Lockheed Retains Neutral Rec - Analyst Blog
02 Janvier 2013 - 4:40PM
Zacks
We currently remain on the
sidelines with Lockheed Martin Corporation (LMT)
due to the impact of the Budget Control Act. The Act has two main
parts that would affect future defense spending. The first part
dictates a $487.0 billion reduction to the previously planned
defense spending over the next decade. The second part is a
sequester mechanism that would impose an $500.0 billion additional
cut on defense spending if the overall U.S. budget deficit is not
reduced. This keeps the risk high for further cutbacks in defense
budgets. However, we believe market pessimism is fully accounted
for in this defense behemoth’s current valuation, which is priced
at a discount to both industry peers and the overall market.
Lockheed Martin is the largest U.S. defense contractor with a
platform-centric focus that guarantees a steady inflow of follow-on
orders from a leveraged presence in the Army, Air Force, Navy and
IT programs. We expect the company to benefit from a strong defense
focus on a number of its platform programs, such as the C-130
Hercules & C-5 Galaxy transport aircraft, F-16 Fighting Falcon
multi-role jet, MH-60 Helicopters, the Advanced Extremely High
Frequency & the Global Positioning Satellite III system
satellites, the Littoral Combat Ship, and the Aegis Weapons
System.
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 was already
sitting on an order backlog of approximately $75.6 billion at the
end of the first nine months of 2012.
Lockheed Martin has one of the strongest balance sheets among its
peers with a stable long-term debt-to-capitalization of 78.0% after
the end of the first nine months of 2012. Lockheed continues to be
a strong cash generator with its operating cash flow reaching
approximately $4.3 billion during fiscal 2011. Management is also
prudent in returning a substantial portion of its free cash flow to
shareholders through share repurchases and incremental dividends.
The company closed the first nine months of 2012 with cash and cash
equivalents of $4.7 billion, and a $1.5 billion revolving credit
facility expiring in August 2016. Total long-term debt of
approximately $6.4 billion was mainly in the form of fixed interest
bearing securities (notes and debentures). All these justify the
Zacks #2 Rank, which translates into a short-term “Buy”
recommendation.
On the flip side, we must remember that a large percentage of
Lockheed Martin’s business comes from the U.S. government (82% of
sales in 2011). Budget deficits and political uncertainty make
future defense budgets vulnerable to cutbacks. Going forward,
Pentagon is seeking to trim about $487 billion in defense spending
over 10 years to meet deficit reduction targets. Also, U.S.
economic fundamentals are basically being kept on a tight leash as
the Euro-crisis continues to cast its spell over financial markets,
risking further cutbacks in future defense budgets.
We are apprehensive about the $15 trillion national debt and
unemployment rate of around 7.7% that would lead to the Budget
Control Act’s dictum of automatic cutbacks across the board going
forward. This would not result in anything extra for defense
goliaths in general and Lockheed Martin in particular.
Given the budgetary cuts and overall scenario, it would not be too
pessimistic to advise investors to adopt a wait-n-watch approach
for the defense and aerospace major. Thus, considering the
company’s business model and fundamentals, we maintain our
long-term “Neutral” recommendation on the stock. This is in sync
with its peers like The Boeing Company (BA) and
Northrop Grumman Corporation (NOC).
Over the longer run, we expect the company to register a stable
performance given its diversified presence in a plethora of defense
platforms and IT know-how. Also, shareholder return will continue
to be shored up by the company’s focus on debt repayment, its
ongoing share repurchase program and the incremental dividend.
BOEING CO (BA): Free Stock Analysis Report
LOCKHEED MARTIN (LMT): Free Stock Analysis Report
NORTHROP GRUMMN (NOC): Free Stock Analysis Report
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