View | Modify | Create | Collaborate
After observing a strong rally in March, the shares of Lockheed Martin have retained their value largely due to multi-year government contracts driving cash flows.
Despite the pandemic, the company has been returning cash to shareholders as dividends and share repurchases.
The second quarter revenues observed 5% (y-o-y) growth majorly driven by the Aerospace and Defense segments. Moreover, net earnings also expanded by 12% (y-o-y).
Lockheed Martin’s shareholder returns are backed by strong fundamentals, a huge order backlog, stable margins, and consistent dividend payout.
Below are the key drivers of Lockheed Martin’s value that present opportunities for upside or downside to the Trefis price estimate:
Lockheed Martin is a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. It also provides a broad range of management, engineering, technical, scientific, logistics, system integration and cybersecurity services.
With the growing threat of attack from airborne missiles, missile defense systems are in demand from governments of many countries including the U.S. Lockheed possesses multiple, highly capable and efficient missile defense systems which include the Aegis, Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD). Sales of these systems will likely bring significant contracts and revenues to the company in the coming years.
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 U.S., the U.K., Canada, and other countries. The F-35 is a crucial program for Lockheed Martin and constituted around 22% of its top line in 2015. Over the coming years, the program is expected to occupy an even larger share in the company’s top line, driven by its planned production ramp-up. Overall, the U.S. government plans to purchase over 2,400 F-35s, while international governments are expected to purchase another 600 F-35s.
Looking ahead, as the production of the F-35 rises in the coming years, this program will drive a significant portion of Lockheed’s value.
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. This is because any cost overruns 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.
About 94% of Lockheed’s revenue comes from the U.S. government through its agencies such as the Department of Defense, Homeland Security, and NASA. As a result of this high reliance on government spending, Lockheed is highly vulnerable to spending cuts from the U.S. government.
In 2011, the passage of the Budget Control Act required defense spending to be slashed by around $500 billion over 2011-2021. These cuts forced the government to slash its defense spending during 2011-2015 steadily. In turn, lower government defense spending decreased overall contract volume for Lockheed. However, looking ahead, with fiscal deficit improving, the government has begun to grow its defense spending. This recovery in U.S. defense spending will likely help increase Lockheed’s contract volume and its top line in the coming years.
With increasing sophistication and growth in cyber attacks in recent years, IT security challenges are mounting for the U.S. 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 will likely maintain the demand for information systems services. Lockheed is one of the key providers of cybersecurity solutions.