Lockheed not just a defensive play

8/4/2008


  Recent Price
$104
  Dividend
$1.68
  Yield
1.6%
  P/E Ratio
14
  Shares (millions)
410
  Long-Term Debt as % of Capital
29%
  52-Week Price Range
$113.74 - $88.86

Rough stock market aside, Lockheed Martin ($104; NYSE: LMT) has already pulled out of a spin this year. In the three-and-a-half weeks following the dismissal of the Air Force’s top brass on June 5, Lockheed shares fell 9%. The Air Force provides Lockheed with 28% of its revenue, and investors worried about uncertainty with the defense contractor’s largest client. However, the stock has since regained much of that lost ground, helped by solid June-quarter results and encouraging statements from the new Air Force chief of staff.

Partial insulation from the economic slowdown, coupled with new military-aircraft programs, give Lockheed attractive capital-gains potential over the next several years. The stock is a Focus List Buy and a Long-Term Buy.

Business breakdown
Lockheed seems well-positioned with regards to the U.S. defense budget, with very little exposure to Iraq. The company is capable of growing profits even if the new U.S. president pulls troops out of the country. While defense-spending growth is likely to slow in coming years, ongoing security threats and the need to replace aging equipment should keep the baseline defense budget, which excludes war-related costs, growing through at least 2012.

A diversified business mix provides investors a measure of safety in a difficult economic climate. After the Air Force, Lockheed’s next-largest end market is civil government and homeland security, accounting for 26% of revenue. The U.S. Navy accounts for 20% of sales and the Army 10%. About 13% of sales are international, and the U.S. communications industry accounts for 3%.

While Lockheed collects most of its revenue from the government, it sells more than defense equipment. The information-systems and global-services unit (20% of 2007 revenue, 18% of profits) provides a variety of services to the military, civil government, and commercial businesses. Space systems (24%, 20%) makes missiles for the military, commercial and government satellites, and space-transportation equipment. Electronic systems (27%, 30%) makes air- , land- , and sea-based missile systems. The aeronautics division (29%, 32%) makes fighter jets and transport planes, including the two major programs of the next decade — the C-130J Super Hercules transport and the F-35 Joint Strike Fighter.

The Congressional Budget Office forecasts that the U.S. Navy and Air Force will rely on the F-35 as the cornerstone of their air power by 2020. The F-35 should provide roughly $300 billion in revenue through the program’s 25-year life.

Production for the C-130J Super Hercules is also accelerating. The transport should start contributing meaningfully to earnings in 2009.

Conclusion
Supported by a diverse business mix and solid recent operating results, Lockheed shares have fallen just 1% this year, versus a 13% decline in the S&P 1500 Aerospace & Defense Industry Index. At 13 times estimated year-ahead earnings, Lockheed is reasonably valued for an industry leader, especially one likely to exceed Wall Street’s expectations for a modest 9% increase in per-share profits this year. An annual report for Lockheed Martin Corp. is available from 6801 Rockledge Drive, Bethesda, MD, 20817; (301) 897-6000; www.lockheedmartin.com.



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