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Lockheed in PAC-3 Missile Deal

Zacks Equity Research

Lockheed Martin Corporation (LMT) has received a firm-fixed-price contract worth $755 million for Patriot Advanced Capability-3 (PAC-3) missiles for foreign military sale (“FMS”).

Lockheed Martin manufactures combat-proven Patriot Advanced Capability-3 (PAC-3) missiles under production contracts from the U.S. Army, Air and Missile Defense Program. The PAC-3 Missile is the most advanced, capable and powerful terminal air defense missile. It can be used against tactical ballistic missiles, cruise missile and aircrafts. The PAC-3 Missile is a high velocity interceptor that counters incoming targets by direct, body-to-body impact. The PAC-3 missile uses a solid propellant rocket motor, aerodynamic controls, attitude control motors (“ACMs”) and inertial guidance to navigate.

The missile is currently used by 12 nations including the US, Egypt, Germany, Greece, Israel, Japan, Kuwait, Netherlands and Saudi Arabia. The missile also proved its efficiency during the Iraq conflict.

In November 2012, under a FMS contract worth $9.9 billion, Qatar had asked for 11 Patriot Configuration-3 modernized fire units, 11 AN/MPQ-65 radar sets, 11 AN/MSQ-132 engagement control systems, 30 antenna mast groups, 44 M902 launching stations, and 246 Patriot MIM-104E guidance-enhanced missile-TBM (GEM-T) with canisters. Also, the package included 10 PAC-3 test missiles with canisters, 11 electrical power plants (:EPPII), 8 multifunctional information distribution systems/low volume terminals (MIDS/LVTs), spare and repair parts, as well as personnel training and training equipment.

Earlier in July 2012, under a FMS program worth $4.2 billion, Kuwait had requested a total of 60 PAC-3 missiles, 4 Patriot radars, 4 engagement control stations, 20 launching stations, 2 information coordination centrals and 10 electric power plants. It had also asked for communication and power equipment, personnel training and equipment, spare and repair parts, as well as logistics personnel services.

In both these contracts, Lockheed and Raytheon Company (RTN) will serve as the principal contractors. Besides improving bilateral relations, these contracts will also bring in revenue for Lockheed Martin.

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. Going forward, we expect the company to register a stable performance driven by its leveraged presence in the Army, Air Force, Navy and IT programs.

However, like other defense peers, Lockheed also faces the fear of major defense budget cuts and delays in execution of programs leading to cost over-runs. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.


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