We have maintained our long-term Neutral recommendation on the defense major Lockheed Marin Corp. (LMT) on Sep 5, 2013.
Why the Reiteration?
Lockheed Martin is the largest defense contractor in the world. The company’s customer base includes the U.S. government, foreign governments and other commercial buyers.
The company delivered better-than-expected second quarter earnings, which surged almost 11% from the year-ago profit level. The upcast in earnings was mainly attributable to strong operational performance. This drove the management to raise its full-year EPS guidance to $9.20–9.50 from $8.80–9.10.
Going forward, we believe Lockheed Martin has significant upside potential based on the Obama administration’s focus on Intelligence Surveillance Reconnaissance (ISR), unmanned systems, force protection, cyber security and missile defense. It already sits on an order backlog of approximately $75.1 billion at the end of the second quarter.
The ongoing Syrian unrest is expected to bring additional revenues for the company. In case of a U.S. led intervention, the U.S. forces are likely to use Lockheed Martin’s Joint Air-to-Surface Standoff Missile, and the Joint Standoff Weapon made by Raytheon Co. (RTN), besides the use of cruise missiles to counter Syria’s 4th Armored Division.
On the flip side, U.S. defense budget cutbacks keep us on the sidelines. A large percentage of its business comes from the U.S. government. So cuts in defense spending could limit the results of its operating segments.
Lockheed Martin has factored sequestration in its 2013 sales guidance. Management now expects revenues to be at the low end of its previous $44.5-46.0 billion projection as it expects an $825 million hit from sequestration.
Other Stocks to Consider
Lockheed Martin presently retains a short-term Zacks Rank #2 (Buy). Other favorable names in the defense space include Northrop Grumman Corp. (NOC) and Alliant Techsystems Inc. (ATK). While Alliant Techsystems carries a Zacks Rank #1 (Strong Buy), Northrop holds a Zacks Rank #2 (Buy).
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