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Investment Overview for Lockheed Martin (NYSE:LMT)
${header:potential}
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 Information Systems New Orders
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US information systems contracts represent the total value (in US dollars) of new orders for Lockheed Martin's aeronautics division in the US. These new orders are assumed net of cancellations (i.e. any cancellations of orders in that year are subtracted from the total new orders).
Since information systems caters to a variety of civil applications as well (such as Department of Energy and the General Services Administration), we do not take the percentage share of orders in total DoD, NASA and Homeland Security contract spending (which has been done for the US Aeronautics, US Electronic Systems and US Space Systems divisions).
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${forecast} was $8.4 billion in 2008. Orders have marginally declined since to reach $7.8 billion in 2012. Orders have come from all 3 lines of business, namely civil, defense and intelligence applications.
We expect ${forecast} to decline over the next few years due to the defense spending cuts, and then remain stable at those levels over the remainder of the Trefis forecast period.
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Trefis considered the following factors for its forecast:
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- Defense spending cuts to impact new orders for Information Systems dvision
- The enactment of the Budget Control Act of 2011 reduces defense spending by $487 billion over a 10-year period starting from the government fiscal year (GFY) 2012.
- Lockheed Martin, which receives more than 80% of its revenues from the U.S. government, will be impacted significantly from the proposed cuts. The extent of the impact will depend on the extent of budget cuts. However, the company anticipates across-the-board cuts to reduce U.S. defense spending by $52 billion in the GFY 2013.
- Termination of several programs
- Over the last few years several program in the US Information System division have been completed. Quite a few of these have not been replaced with contracts of equivalent value.
- As such, this has led to a decline in new orders for the division. For example, The Decennial Response Integration System (DRIS 2010) contract was designed to provide a multi-channnel system for collecting and analyzing the US 2010 consensus data. The contract contributed significantly to the 2010 revenues for the division. However, with a substantial portion of the DRIS complete in 2010, net orders relating to the program have declined since. Other such programs include ODIN (Outsourcing Desktop Initiative for NASA) and JTRS (Joint Tactical Radio System)
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- Focus to shift towards services
- From 2008 to 2010, the DoD (department of defense) has placed stronger emphasis on procuring services over products. Spending on products had declined by 15.3% in the last 3 years while spending on services has increased by 7.3%.
- In overall DoD contracting, services have grown at a faster pace than products. Barring any future military contingencies (such as the global war on terror), services are expected to grow at a higher rate than products.
- From the company's perspective as well, services have increasingly occupied a larger share of overall company revenues, increasing from 17.6% in 2008 to 20.4% in 2010. We expect this trend to be significantly drive new orders for US Information Systems in future years.
- 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 and 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, particular in the civil line of business (which caters to the fields data protection and sharing).
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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