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Lockheed Clinches a Chunk of DoD Handouts

Zacks Equity Research

The largest U.S. defense operator, Lockheed Martin Corp. (LMT) received three back-to-back contracts from the Department of Defense (DoD), fetching $875 million or approximately 84% of the total orders awarded on Mar 25.

The prime award was a $698 million fixed-price-incentive, firm target, advanced acquisition order for the procurement of long-lead parts, materials, and components required to build 57 Low-Rate Initial Production, or LRIP, Lot IX F-35 Lightning II Joint Strike Fighters. The contract includes aircraft for the U.S. Air Force, the U.S. Marine Corps, the U.S. Navy as well as for other international clients comprising Israel, Norway, U.K., Japan and Italy. The work on this contract is expected to be completed through May 2015.

The F-35 Lightning II Joint Strike Fighter is the 5th Generation Stealth fighter comprising radar evading stealth, supersonic speed and extreme agility with the most powerful and wide-ranging integrated sensor package of any fighter aircraft in history.

The defense prime’s F-35 fighter jet engines are made by U.S. based Pratt & Whitney and U.K.’s BAE Systems as its main international partner. It also includes Northrop Grumman Corp. (NOC) and United Technologies Corp. (UTX) as partners on the F-35.

The second contract, worth $93 million, went to Lockheed Martin’s Mission Systems and Training division. This calls for the company to exercise options for the production of Aegis Ashore Missile Defense System (:AAMDS) in Poland and to provide multi-year procurement funding for Aegis Weapon System (AWS.V) MK 7 equipment sets. The contract is expected to be completed by Sep 2021.

Finally, Lockheed Martin won an $84.3 million contract to work on the C-5 Core Mission Computer/Color Weather Radar Engineering, Manufacturing and Development Program. This contract runs through Mar 31, 2017.

Lockheed Martin receives over 80% of its revenues from the U.S. government, including around 60% from the DoD. Although the threat from sequestration remains for periods beyond fiscal 2015 and casts a shadow of uncertainty about long-term funding, these defense deals are a testimony to the wide range of products at the disposal of Lockheed Martin.

It is worth mentioning here that sequestration reduced the government’s defense budget by $37 billion in 2013, which negatively impacted Lockheed Martin sales. However, in January, the government increased its limits on discretionary spending in line with the Bipartisan Budget Act passed in Dec 2013. With a gradual strengthening of the global economy and the budget issues drawing to an end, the defense majors are expected to see stability in 2014.

Lockheed Martin has a Zacks Rank #2 (Buy). A better-ranked stock in the aerospace and defense industry include Huntington Ingalls Industries, Inc. (HII) carrying a Zacks Rank #1 (Strong Buy).

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