A Deeper Look At Lockheed Earnings: F-35 Program Promises Bright Topline Growth

Lockheed Martin (NYSE: LMT) reported its third quarter earnings on October 20, 2015. The defense contractor posted a better than expected top line growth of 3% and revised the full year guidance to $45 billion, slightly up from the previously stated range of $43.5 – $45.0 billion. ^[1] Lockheed is the only listed player in the industry to beat estimates and post comfortable revenue growth due to its F-35 Joint Strike Fighter Program hiking production and sales volume. Additionally, the company has acquired UTC’s Sikorsky business to improve exposure to Defense aerospace contracts and declared underperforming segments under strategic review for the fiscal to weigh among options ranging from a spinoff to sale of businesses.

Lockheed’s YTD share price performance has been impressive as a result of strong performance and posting better than expected results. The stock outperformed the broader index S&P 500 by posting returns of 9.44%. ^[2]

We currently have a stock price estimate of $108 for Lockheed, which is inline with its current market price.

See our complete analysis of Lockheed here

The F-35 Joint Strike Fighter Program Will Primarily Drive Aeronautics Topline Growth

The aeronautics business, which accounts for 35% of the company’s valuation, posted a topline growth of 9.6% year over year in the third quarter. This can be attributed to higher net sales of F-35 aircraft due to increased volume and sustainment activities. The margins improved as well as a result of higher volume of F-35 production, partially offset by disappointing F-22 program performance. The F-35 JSF Program proved the operational capability of its F-35B variant in July with the U.S. Marine Corps declaring it the first variant available for combat operations. The company also rolled out the F-35 aircraft for Norwegian Armed Forces in the last quarter. In the wake of these developments, Lockheed has hiked production of the F-35 and expects to achieve ~45 aircraft deliveries in 2015, up 25% compared with 2014. ^[3] The program is generating ~20% of the company’s corporate revenues and is expected to expand going forward.  The U.S. has marginally increased the procurement budget by 2% this year and the company has increased its focus on geographic expansion.

Acquisitions And Reviewing Challenging Segments

The company announced an agreement to purchase of United Technologies’ Sikorsky business in July this year which is expected to be completed in the fourth quarter post the required regulatory processes. Lockheed has increased its exposure to the military aerospace market through the acquisition of Sikorsky helicopter business. The company already generates ~80% of its revenue from U.S. Government contracts, including ~60% from Department of Defense contracts.

The company also announced a strategic review of its government information technology infrastructure services and technical services businesses due to difficult market conditions and intense competition. The company is weighing options amongst spinoff of shareholders, reverse Morris Trust transaction or sale of these businesses in order to maintain the company’s topline and bottom-line growth.

Enhancing Shareholder Returns By Hiking Dividend Payouts And Accelerating Repurchasing

The company generated cash from operations over $3.7 billion year to date to be deployed to enhance stakeholder value in the form of higher dividend payouts and accelerated share repurchases. Despite inconsistent cash inflow from operations, Lockheed has displayed a consistent double digit increase in dividend payout for the 13^th consecutive year of operations by declaring a 10% increase in dividends to $1.65 per share. Also, the company accelerated its repurchasing activity, buying 4.1 million shares for $823 million this quarter, against 2.6 million shares in the same period last year. Additionally, the defense conglomerate plans to continue making share repurchases until 2017 in order to bring down the shares outstanding to less than 300 million.

Note: YTD values have been calendarized for the sake of projection

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1. Lockheed Martin Third Quarter Earnings, Lockheed Martin, October 20, 2015 [↩]
2. Lockheed Martin Stock Price Movement, NYSE, October 21, 2015 [↩]
3. Lockheed Martin Third Quarter Earnings Transcript, The Street, October 20, 2015 [↩]