Neutral on Lockheed Martin - Analyst Blog
15 Mai 2013 - 6:50PM
Zacks
We maintained our long-term Neutral
recommendation on aerospace and defense major Lockheed
Martin Corporation (LMT) on May 10, 2013. The company’s
first quarter 2013 results and its leveraged presence in the Army,
Air Force, Navy and IT programs are somewhat undermined by its
operational dependency on the US government and cuts in defense
spending.
Why Kept Neutral?
The world’s largest U.S. defense contractor, Lockheed Martin
reported strong first quarter 2013 earnings that surpassed our
expectations by 23.4%. Earnings in the reported quarter also surged
2.5% from the year-ago adjusted profit level. The upcast in
earnings was mainly attributed to lower tax expenses.
Lockheed Martin continues to benefit from strong defense spending
on a number of its platform programs like the C-130 Hercules &
C-5 Galaxy transport aircrafts, the Global Positioning Satellite
III (GPS III) system satellites, the Littoral Combat Ship (LCS),
the Terminal High Altitude Area Defense (THAAD) system and many
others.
The company is a well-managed defense major. Its working capital
improvements continue to impress, as is evident from its inventory
turnover of 15.2 times in the trailing twelve months at the end of
the first quarter, compared to only 2.8 times for the Zacks
industry average, showing a strong sign of operational
efficiency.
In addition, Lockheed Martin’s operational effectiveness is evident
in its industry-high Return on Investment (ROI) of 38.7%. This will
aid the company to accomplish its long-term goal of 5%–7% revenue
growth. Lockheed Martin affirmed its full-year 2013 earnings per
share guidance of $8.80–$9.10.
Management is also prudent in returning a substantial portion of
its free cash flow to shareholders through share repurchases and
incremental dividends. It booked free cash flow of roughly $1.9
billion during the first quarter and utilized roughly $900 million
for stock buybacks and dividend.
However, a major portion of its business comes from the U.S.
government, so cuts in defense spending could limit the results of
its operating segments. It has factored sequestration in its 2013
sales guidance, which is expected to be at the low end of the prior
range.
Going forward, growth in the Information Systems & Global
Services and the Mission Systems & Training segments is
critical as sequestration is expected to impact about $275 million
in each of these segments with the remaining in the other business
areas.
Given the pros and the cons, the stock is expected to perform in
line with the broader market indices. Currently, Lockheed Martin
has a Zacks Rank #3 (Hold).
However, we prefer peers like Erickson Air-Crane
Incorporated (EAC) with a Zacks Rank #1 (Strong Buy), and
Wesco Aircraft Holdings, Inc. (WAIR) and
Northrop Grumman Corp. (NOC), both with a Zacks
Rank #2 (Buy).
ERICKSON AIR-CR (EAC): Free Stock Analysis Report
LOCKHEED MARTIN (LMT): Free Stock Analysis Report
NORTHROP GRUMMN (NOC): Free Stock Analysis Report
WESCO AIRCRAFT (WAIR): Free Stock Analysis Report
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