Lockheed Boosts Stock Repurchase As Weak U.S. Military Spending Pressures Its Top Line

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Lockheed Martin

Lockheed Martin (NYSE:LMT) has said that it will reduce its outstanding share count to below 300 million over the next 3 years from roughly 315 million currently. [1] The company outlined this buyback strategy while announcing its third quarter results in which its top line continued to fall due to weak U.S. military spending. At an average share repurchase price of $175, this stock buyback program will return approximately $2.6 billion to Lockheed’s shareholders over the next 3 years. Additionally, last month, Lockheed raised its fourth quarter dividend by 13% to $1.50 per share. [2] We figure this solid return of cash to Lockheed shareholders through stock buyback and dividends is helping address investor concerns arising from the flat-to-declining U.S. military spending, which accounts for a majority of Lockheed’s business. At the same time, share buyback by reducing outstanding share count is enabling the company to grow its per share profit despite declining top line.

In the third quarter, on gains from past cost cutbacks and a reduced share count, Lockheed was able to raise its earnings by 7% annually to $2.76 per share. But, due to lower overall contract volumes resulting from weak U.S. military spending, Lockheed’s third quarter top line fell by 2% annually to $11.1 billion. [3] Lockheed is highly dependent on U.S. spending as it generates about 80% of its revenue from U.S. government contracts including about 60% from Department of Defense (DoD) contracts. In the first nine months of 2014, Lockheed’s revenue has declined by a little over 2% annually, and for full year 2014, the company anticipates its revenue to be around $45 billion, down from $45.4 billion in 2014 and $47.2 in 2012. [3] Looking ahead, Lockheed anticipates its revenue to continue to decline through 2015, falling by low single-digits rate. In our opinion, this indicates that U.S. military spending hasn’t bottomed out and it could further decline in 2015.

Another cause for concern is that Lockheed’s backlog is falling. The company’s backlog has steadily declined from a record $82.6 billion at the start of 2014, to $76.5 billion at the end of the third quarter. [3] Though this decline is not very steep, the trend is a cause for concern as backlog is a crucial indicator of future revenue. In our opinion, this decline in Lockheed’s backlog again reflects the negative impact from flat-to-declining U.S. military spending.

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We currently have a stock price estimate of $165 for Lockheed, around 8% below its current market price. We are in the process of incorporating Lockheed’s third quarter results and shall update our analysis shortly.

See our complete analysis of Lockheed here

Lockheed Boosts Stock Buyback

In September, Lockheed increased its share buyback authorization by $2 billion, bringing the company’s total buyback authorization to $3.9 billion at the end of September. [3] [4] So, we figure the company has enough capital authorized for share buyback to undertake the entire planned reduction in its share count over the next 3 years. Through the first nine months of this year, Lockheed has bought back shares worth approximately $1.6 billion, and we figure this has played a key role in growing the company’s per share earnings in the third quarter.

Lockheed Is Focusing On Growing International Sales

Separately, to temper the impact from weak U.S. military spending Lockheed is reducing its costs. At the start of this year, the company said that it plans to reduce its facility footprint by 2.5 million square feet through 2015. In addition, Lockheed has increased its focus on international markets to reduce its dependence on U.S. spending. We figure strong international demand for F-35 fighter jets and missile defense systems will likely help the company grow its international sales. In the third quarter earnings announcement, Lockheed said that it anticipates to generate 20% of its 2014 revenue from international sales – a target that the company had set a few years back. The company also said that it could generate nearly a quarter of its total revenue from international sales over the next few years driven by growing international sales of the F-35 jet. [1]

The F-35 program, which is the single-largest military program for Lockheed, currently constitutes about 18% of the company’s total revenue. In the third quarter, higher production volume of F-35 partially offset the negative impact from lower U.S. military spending. We figure as production of F-35 ramps up in coming years, this program will play a key role in growing the company’s results. Lockheed anticipates to produce roughly 3,000 F-35s over the next 2-3 decades. Of these, about 2,400 will likely be procured by U.S. military forces and the remaining by international partner countries, which include the U.K., Italy, Australia, Canada, Norway, Denmark, Netherlands, Turkey, Japan and South Korea.

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Notes:
  1. Lockheed’s 2014 Q3 earnings transcript, October 24 2014, www.seekingalpha.com [] []
  2. Lockheed Martin declares its fourth quarter 2014 dividend, October 24 2014, www.lockheedmartin.com []
  3. Lockheed’s 2014 Q3 earnings form 8-K, October 24 2014, www.lockheedmartin.com [] [] [] []
  4. Lockheed Martin Increases Share Repurchase Authority by $2.0 Billion, September 25 2014, www.lockheedmartin.com []