Lockheed Revises FY’15 Earnings Guidance in Light of Strong Q1 Performance
Lockheed Martin (NYSE:LMT) announced its Q1 2015 earnings on April 21, 2015. The company reported $10.1 billion in revenues for the first quarter, slightly lower than the $10.2 billion that analysts expected. The lower revenues were primarily driven by the Aeronautics and Mission & Fire Control (MFC) divisions, attributable to fewer deliveries in weak U.S. defense spending environment. On the other hand, the company managed to drive its earnings per share above analyst expectations. For Q1 2015, earnings per share reported was $2.74, while the consensus for the quarter stood at $2.48. [1] In light of strong earnings performance, the company revised its guidance for earnings in fiscal 2015. Previously issued guidance for FY 2015 EPS was $10.80-$11.10, which has now been increased to $10.85-$11.15. [2] This increase will be driven by a $50 million increase in expected operating profits, as the company noted a stronger than expected performance in Q1 2015 because of several cost-cutting initiatives incorporated.
We currently have a price estimate of $197 for Lockheed, approximately around its current market price.
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Higher Volumes of F-35 Partially Offset the Impact of Weak U.S. Defense Spending
The Aeronautics division witnessed a 7% decline in revenues on a year-over-year basis in Q1 2015. This was driven by fewer deliveries and sustainment activity across most programs such as the C-130, C-5 and F-16, as overall military spending in the U.S. continued to remain weak. Consequently, operating profits witnessed a 6% decrease in Q1 2015 on a year-over-year basis. The impact of the fall in revenues and operating profit due to these programs was partially offset by Lockheed Martin’s F-35 program. Higher F-35 volumes as well as sustainment activities resulted in the program witnessing a $175 million year-over-year increase in net sales and $25 million increase in operating profit in Q1 2015. ((Lockheed Martin Reports First Quarter 2015 Results, Lockheed Martin)) The F-35 has witnessed strong demand in international markets, hence leaving it relatively unaffected by the defense spending cuts. Lockheed Martin confirmed that this trend of growing international demand of F-35s continues, as over half of the orders expected for this fighter jet in the next five years is expected to come from international customers. [3]
MFC witnessed a 19% decrease in net sales and an 18% decrease in operating profits due to lower deliveries in the weak U.S. military spending environment. [2] The performance of both of these divisions highlight the fact that Lockheed’s overall sales are largely dependent on U.S. military spending. To reduce the company’s sensitivity to U.S. military budget cuts, the company intends to expand more aggressively in international markets. In the Q1 2015 earnings call, the company announced that it intends to move towards generating 25% of its revenues from international customers over the next years. ((Lockheed Martin’s (LMT) CEO Marillyn Hewson Discusses Q1 2015 Results – Earnings Call Transcript, Seeking Alpha))
At the same time, the company also sees good news in the U.S. 2016 fiscal budget, which proposes significant hikes in defense spending. The budget proposes an increase in the overall defense budget by about 4% to $585.2 billion in fiscal 2016, from $560.3 billion in the current fiscal year. If this budget is approved by Congress, the increase in weapons procurement will benefit Lockheed, which is the largest defense contractor of the U.S. government. ((Summary tables for the President’s 2016 budget proposal, February 2 2015, www.whitehouse.gov)) So, even as 2015 might remain a relatively slow year in terms of sales and earnings growth at Lockheed, it is on track to show strong growth from 2016.
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