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Lockheed Martin: Another Street-Beating Quarter With Boosted Expectations

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GuruFocus.com
·4 min read
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- By Margaret Moran

Before the markets opened on April 20, U.S. aerospace and defense giant Lockheed Martin Corp. (NYSE:LMT) reported earnings results for its first quarter of fiscal 2021, which ended on March 28.

It was another impressive quarter for the company, which grew both its top and bottom lines and surpassed analyst expectations on the earnings front while meeting estimates on the revenue front. However, the stock was down around 1.72% to $385.01 in midday trading due to concerns that the high costs of specific programs could cause customers to reassess their orders.


Lockheed Martin: Another Street-Beating Quarter With Boosted Expectations
Lockheed Martin: Another Street-Beating Quarter With Boosted Expectations

Earnings results

For the quarter, Lockheed Martin recorded net sales of $16.3 billion and adjusted earnings per share of $6.56, which compared favorably to the $15.7 billion in revenue and adjusted earnings of $6.08 in the prior-year quarter. Analysts had been expecting revenue of $16.3 billion and adjusted earnings of $6.30.

By segment, Missiles and Fire Control sales rose 5% to $2.75 billion, while Rotary and Mission Systems climbed 10% to $4.1 billion and Space sales were up 3% to $3 billion. Aeronautics sales inched up 0.3% to $6.38 billion.

Contributors to the strong results included higher volumes of classified contracts, increased F-16 production and increased sales of Patriot Advanced Capability-3, Joint Air-to-Surface Standoff Missile (JASSM) and Long Range Anti-Ship Missile (LRASM) missiles.

On the downside, F-35 sales declined by $65 million, which the management attributed mainly to development being down. CEO James Taiclet told analysts that the company is working on the F-35's affordability, with the goal of reducing its cost per flight hour to $25,000 from the current $36,000, as budget pressures have forced the U.S. Air Force to review whether the expensive technology is worth the incredibly high price tag.

"It's an expensive machine, and it's expensive to maintain, in large part because of the stealth technology, that is more advanced than anywhere else," Taiclet said.

The company noted that unrealized gains from investments in the Lockheed Martin Ventures Fund contributed 18 cents per share to the results, while severance from job cuts and restructuring fees cost 10 cents per share.

In terms of cash returns to shareholders, the company repurchased 1.9 million of its own shares during the quarter for a consideration of $1.0 billion and paid out $739 billion in dividends.

As of the quarter's end, cash and cash equivalents stood at $2.93 billion compared to $1.98 billion a year ago, while long-term net debt was $11.65 billion versus last year's $11.66 billion.

Looking forward

In 2021, Lockheed Martin expects tailwinds from an increase in international defense cooperation, which would expand its customer base. For example, the Biden administration recently told Congress of its plans to continue with the previous administration's approval of the sale of F-35s and other weapons to the United Arab Emirates.

However, the F-35 is facing another testing delay as the jet might not complete a major piece of its combat simulator testing until September of 2022, so investors might reasonably expect further issues on this front.

For full fiscal 2021, the company has revised its guidance upward compared to its initial estimates in January. Lockheed Martin now expects net sales for the year to be in the range of $67.3 billion to $68.7 billion, with diluted earnings per share between $26.40 and $26.70. Cash from operations is predicted to be at least $8.9 billion.

Valuation

As of April 20, Lockheed Martin has a price-earnings ratio of 15.89, which is lower than 69% of industry peers and falls below its own 10-year median price-earnings ratio of 16.33. The GuruFocus Value chart rates the stock as fairly valued.

Lockheed Martin: Another Street-Beating Quarter With Boosted Expectations
Lockheed Martin: Another Street-Beating Quarter With Boosted Expectations

While Lockheed Martin is expected to continue its growth trajectory, it has a history of predictable top- and bottom-line growth, both of which typically beat Wall Street's estimates by a certain margin. In other words, investors have come to expect certain results from the company, so while it does seem slightly undervalued at the moment, there would likely need to be some sort of additional stimulus to drive multiples expansion beyond a reversion to the mean.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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This article first appeared on GuruFocus.