What Are The Biggest Drivers To Lockheed Martin’s $93 Fair Value?

by Trefis Team
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Lockheed Martin’s (NYSE:LMT) biggest customers are government agencies such as the Department of Defense and the Homeland Security. In 2011, revenues from the U.S. government constituted 82% of Lockheed’s $46.5 billion in sales. [1] This made the company the largest defense contractor to the U.S. government, significantly ahead of Boeing (NYSE:BA) which occupied the second position with U.S. defense sales of $22.1 billion in 2011.

However, this high degree of dependence on the U.S. government also makes the company vulnerable to cuts in the government’s military spending. The U.S. defense funding is scheduled to decline by $487 billion over a ten-year-period starting from the government fiscal year (GFY) 2012. This presents the company with uncertainty in the near term.

On the bright side, Lockheed’s long association with various U.S. government agencies and its impressive track record position it well to retain its top position as a defense contractor to the U.S. government. This largely underscores its current valuation in our opinion. Major defense programs like the F-35 joint strike fighter where the company is a prime contractor also support its current valuation.

We currently have a stock price estimate of $93.20 for Lockheed Martin, marginally above its current market price.

See our complete analysis of Lockheed here

The company’s core programs are classified into Aeronautic, Electronic, Space and Information programs.

1) Aeronautics: We estimate aeronautic programs to constitute 37% of Lockheed’s value. Among these programs, the F-35 program which accounted for 42% of total divisional revenues in 2011 is the most important. [1] Under this program, Lockheed anticipates to produce 3,100 F-35s for the U.S. defense forces and 10 other partner/client countries. Until now, the company has received production orders for 95 F-35s and has delivered 26 of these through the end of the third quarter of 2012. [2] We expect the F-35 program to continue to drive the company’s sales and earnings over the next several years.

Other major programs in the Aeronautics division include: the F-16 program (production under which is ongoing for foreign governments under the foreign military sales (FMS) process of the U.S. government), the F-22 program (production under which ended in 2012 but support activities continue), and the C-130J Hercules program.

2) Electronics: The electronic programs constitute 33% of Lockheed’s total value, according to our estimates. Missile and weapon systems are the largest portion of this division’s value. Some of the major systems include Aegis combat system, a weapons system for the U.S. Navy, and PAC-3 (Patriot Advanced Capability) & THAAD (Terminal High Altitude Area Defense) which are missile systems for the U.S. Army. The UAE was the first international customer for THAAD.

Other prominent program is Littoral Combat Ships (LCS) which operate in shallow waters.

3) Space and Information Systems: Space and Information systems constitute nearly equal portions of the remaining 30% of Lockheed’svalue, according to our estimates. In the former, the company develops global missile tracking capabilities and GPS systems. The Orion program – a crew vehicle program for NASA – was a major program of this division. However, the activity under Orion declined with the completion of the space shuttle program.

Under Information systems, Lockheed designs, maintains and upgrades communication systems and provides cyber security services.

The company has a broad portfolio of programs and a long history of successful program completions. Coupled with expertise in various defense systems, Lockheed seems well-positioned to continue to occupy a large share of the U.S. government’s future defense outlays. Further, with the global security situation being far from stable, the U.S. government’s defense spending is expected to remain significant even after the proposed cuts, providing support to Lockheed’s valuation.

Additionally, the company is increasing its focus on international sales. This will allow it to benefit from increasing defense spending from various countries including Saudi Arabia, India, Korea and Brazil. However, restrictions on specific product exports and exports to certain countries will limit growth possibilities in international sales.

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Notes:
  1. 2011 10-K, February 23 2012, www.lockheedmartin.com [] []
  2. 2012 Q3 10-Q, October 25 2012, www.lockheedmartin.com []
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