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Investment Overview for Lockheed Martin (NYSE:LMT)
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Below are the key drivers of Lockheed Martin's value that present opportunities for upside or downside to the Trefis price estimate:
US Aeronautics
- US Aeronautics EBITDA Margin: EBITDA margins for the US Aeronautics division was 14.4% in 2007 before increasing to 15.4% in 2008. Since 2008, margins have declined for the division, reaching 14.5% in 2012. The decrease reflects the life cycles of the division's current programs, as the aeronautics division is performing more work on the new F-35 program, and less work on more mature programs like the F-22 and F-16. We estimate US Aeronautics EBITDA margins to remain stable over the Trefis forecast period.
If however, margins decline to 13% due to increased US government emphasis on fixed price contracts or pressure from defense budget cuts, then there will be potential downside of around 5% to the ${trefisprice}. On the other hand, if margins improve to 16.5% by the end of the Trefis forecast period due to benefits from cost-cutting and improved performance on the F-35 program, then there will be a potential upside of nearly 5% to the ${trefisprice}.
US Electronic Systems
- US Electronic Systems EBITDA Margin: US Electronic Systems EBITDA Margin was 15.8% in 2007. Margins stayed at nearly the same levels in 2008, but declined to 14.8%-15% over 2009-11 due to higher overall corporate expenses compared to 2008 levels. However, margins recovered to 16.1% in 2012 driven by improved program implementation. we currently anticipate margins to improve marginally in the near term and then remain stable over the remainder of the Trefis forecast period.
If however, margins decline to 14% by the end of the Trefis forecast period due to pressure from government defense spending cuts then there will be a potential downside of nearly 5% to the ${trefisprice}..
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Lockheed Martin is the largest defense contractor in the United States, with contract awards from US government agencies exceeding $35 billion in 2011 by our estimates.
Lockheed Martin makes money by designing, producing and supplying defense, space and security products/services for defense agencies of various nations, primarily the United States as well as commercial customers. Some examples of these products include combat and transport aircrafts, missile systems, information technology solutions and satellite and commercial launch technologies. The company enters into short and long-term contracts with various defense agencies for supply of these products in future.
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Electronic Systems
Under the non-US electronics division, the Aegis Weapon system remains the preferred weapons system for Australia, Japan, Norway, the Republic of Korea and Spain, and we expect future contract awards to the company to support and sustain existing Aegis systems. Other business lines within the division have also shown strong international demand. Since foreign military sales (FMS) provide a relatively higher margin over domestic sales, we expect Lockheed Martin to increase its focus on driving international sales, especially since domestic (US) focus is shifting towards lower margin activities such as training and sustainability. Based on these trends, the Non-US Electronic Systems division is a significant source of future value for the company. Additionally, the electronic systems division has consistently contributed to higher margins as compared to Lockheed's aeronautics division, owing to higher development costs and longer life cycles for the latter. This increases the relative contribution of electronic systems to the company's stock further.
US Aeronautics
The F-35 is a multi-role combat aircraft being developed by Lockheed Martin. The aircraft is part of the Joint Strike Fighter (JSF) program, intended to replace a wide range of existing combat aircraft in the US, UK, Canada and other allies. The F-35 is a crucial program for Lockheed Martin, constituting a significant portion of the overall value of the company. From the US government's perspective, the F-35 is one of the most expensive defense programs ever, with plans to purchase over 2,400 aircraft (subject to changes in future). While the program has faced schedule delays in the past, the strategic importance of the F-35 program should ensure sustained government investment in future years. We expect the F-35 program to be a major source of value for Lockheed, accounting for a significant chunk of contract awards and operating income for the US Aeronautics division in future years.
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Increase in fixed price contracts
With a 2009 directive by the Office of Management and Budget (OMB) to further migrate from cost-based to fixed-price based contracts, we expect the company's divisions to be subjected to higher risk, as any cost over-runs would directly impact margins under a fixed-price contract (unlike a cost-reimbursement contract, where the contractor is paid for all of its allowed expenses to a set limit plus additional payment to allow for a profit). This trend can significantly impact Lockheed Martin's EBITDA margins in future years.
US military spending can influence defense based revenues
Over 80% of Lockheed Martin's revenues come from the US government through its agencies such as the Department of Defense and NASA. As a result of this, Lockheed's revenues are largely dependent on US military spending. Any military budget cuts in future due to budgetary pressures can significantly impact Lockheed Martin's revenues and EBITDA from all divisions.
Increased emphasis on cyber security
With increasing sophistication and growth in cyber attacks in recent years, IT security challenges are mounting for the US government, which include cyber threats from foreign nations and terrorist organizations as well as virus/malware intrusions. We expect this trend to drive increased strengthening of the Federal IT infrastructure. This should spur demand for information systems services in the US.
Trefis Forecast Rationale for US Aeronautics Change in Backlog
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Change in Backlog for US Aeronautics refers to the change in the total value of sales orders waiting to be filed for the division on a yearly basis.
Backlog provides an indicator to the future sales and earnings of the division. A growth in backlog is indicative of new contracts/orders the division is obligated to fulfill in future. However, a high growth in backlog may also be an indication of declining production rates (due to reasons such as production delays and delays in certification) due to which the company/division is unable to fulfill its production obligations.
Similarly, a decrease in backlog is indicative of additional products/services deliveries in that year (hence increasing revenues/earnings). However, a high negative growth in backlog might also be indicative of the company/division failing to get new orders (in this case, from the US government), which indicates a decline in demand for the company's product/service offerings. Negative backlog growth is also indicative of a cancellation of contracts.
Backlog is essentially a derived figure, which depends on the rate at which a company gets new orders and the rate at which it delivers on prior orders/contracts (i.e. revenue).
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${forecast} was -$600 million in 2007. This figure increased to $1.5 billion in 2008, due to the increased orders on the C-130J and F-35 programs. Backlog remained fairly stable during 2009-2010, as overall sales in combat and transport aircraft balanced new orders for the same. Backlog increased by around $0.5 billion in 2011 and 2012 each owing to the fewer billing of orders.
We expect US Aeronautics Backlog to decline marginally over the Trefis forecast period owing to pressure from defense spending cuts.
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Trefis considered the following factors for its forecast:
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- U.S. defense spending cuts to weigh on backlog
- The enactment of Budget Control Act of 2011 proposes to cut defense spending by $487 billion over 10 years beginning in fiscal year 2012.
- These cuts are expected to weigh heavily on Lockheed Martin as the company receives more than 80% of its revenues from the U.S. government.
- In such as scenario, new orders are expected to decline resulting in decline of ${forecast}.
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- F-35 related contracts should build backlog
- The F-35 is a multi-role combat aircraft being developed by Lockheed Martin. The aircraft is part of the Joint Strike Fighter (JSF) program, intended to replace a wide range of existing combat aircraft in the US, UK, Canada and other allies.
- The F-35 is a crucial program for Lockheed Martin, contributing to about 12% of the company's total sales in 2010.
- From the US government's perspective, the F 35 is one of the most expensive defense programs ever, with plans to purchase over 2,400 aircraft (subject to changes in future).
As the company experiences schedule delays in the initial period for F-35 related programs (such as the current schedule dealys being faced in SDD or System Development and Demonstration programs), we expect the US Aeronautics backlog to increase in the near future.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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