Lockheed Martin: Ignore the Naysayers
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Lockheed Martin (NYSE: LMT) designs and manufactures products for the defense and aerospace industries. The company’s headquarters are in Bethesda, Maryland, and it has a market cap of $29.3 billion.
Lockheed’s primary source of revenues comes from defense contracts. Roughly 80% of Lockheed’s revenues come from the United States Government. Of the 80%, about 60% comes from the Department of Defense. That is why Lockheed’s executives and investors are greatly concerned about how the government’s sequestration process will work out. There is at present “very little insight or detailed understanding as to how sequestration will be implemented even though this law requiring an additional $55 billion reduction in both defense and in non-defense discretionary accounts will take effect January 2, 94 days into the government fiscal year.”
It is estimated that the United States will budget about $931 billion for defense in 2013, so if sequestration is implemented the $55 billion reduction will amount to 6% of the total defense budget. What is most troubling for Lockheed investors is that if the sequestration reductions are put in place, weapons projects such as the very lucrative F35 project could be reduced. It has been said that the F35 project, with a total estimated cost of around $57.7 billion per year, is the most expensive weapons system on the planet.
While sequestration seems possible, important people are speaking out against it. The Secretary of Defense Leon Panetta has said such “automatic cuts, which would total around $55 billion in 2013, would be “disastrous” for the defense budget. Leading Republicans have also been speaking out against automatic defense cuts. On August 7th, President Obama signed a bill that will allow him to detail early next month how he'd make the first phase of $1.2 trillion in spending cuts. This new bill will give Lockheed some time to plan, so that it can properly and responsibly prepare to act. Regardless of what happens in the sequestration negotiations, money that is already in the pipeline for long-term defense contracts would not be affected
Despite the threat of sequestration, Lockheed insiders and investors do not seem to be worried. There has not been a lot of insider selling except for the cashing in of stock options, and investors have pushed the stock price near to its 52 week high. In an additional show of confidence, Lockheed raised full year EPS estimate from $7.70 to $7.90 per share to $7.90 to $8.10 per share. There have been threats of budget cuts in the past, and defense contractors have never lost out. That helps to explain why Lockheed’s revenues have increased in each of the last ten years.
Lockheed’s primary competitors are General Dynamics (NYSE: GD), Raytheon (NYSE: RTN) and Northrop Grumman (NYSE: NOC). Each of Lockheed’s competitors has a price to earnings ratios of around 9 and yields of between 3.2% and 3.6%. Apparently the threat of sequestration has not spooked their investors either, as the stock prices of Raytheon and Northrop Grumman are near 52 week highs and General Dynamics is up for the year.
Positives news for Lockheed moving forward
On July 30th, Lockheed Martin was awarded a $21.4 million contract from the U.S. Army for its commercial GyroLink system for the Remote - Vehicle Optics Sensor System (R-VOSS) program. GyroLink provides a real-time full motion video network that transmits video across military vehicles at significant distances.
On July 19th, Lockheed Martin received a $353.2 million U.S. Army follow-on contract for the seventh production lot of Guided Multiple Launch Rocket System (GMLRS) Unitary rockets, designed for destroying targets at ranges up to 70 kilometers.
In the area of new United States contracts, Lockheed received a $490 million contract for long lead on LRIP 7. This authorization enables procurement activities to begin for 35 aircraft and add stability to the supplier base and production line. In its international business, “Norway announced their initial order for two aircraft, which is expected to be followed by up to 50 additional aircraft.” “Japan reaffirmed their intentions to purchase the F-35 and signed a letter of offer and acceptance to order 4 initial aircraft.”
Conclusion
The biggest problem that Lockheed faces at this time is the government sequestration. I do not believe that the politicians will use the sequestration in a way that will harm the defense contractors. If there is anything to be gleaned from the way that the defense contractors stocks have performed, I am not alone in that theory. I admire Lockheed because the company has been able to consistently grow earnings, and it has products that cannot be easily duplicated. For example, its F35 fighter jets are the most sought after fighter jets in the world. That is why its F35 contracts are easily the company’s most lucrative. The United States government has long term plans to purchase 2,443 F35 planes for a total of $323 billion. Lockheed also has plans to sell F35’s to eight other countries albeit in much smaller numbers. Lockheed also has numerous other high value long term contracts in the works. In addition, it is making progress in its international businesses. Finally, I prefer Lockheed over its competitors because it is the best of breed in the defense industry. It is the largest contractor with the highest (4.5%) dividend yield. I think that Lockheed Martin is an excellent long-term investment.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
