What Can We Expect From Lockheed Martin’s Q4 2016 Earnings?

Lockheed Martin (NYSE: LMT) has performed solidly in the first three quarters of the year, beating analyst estimates for earnings every time. We believe this momentum continued into the fourth quarter as well on the back of higher F-35 sales and the Sikorsky inclusion.

Furthermore, the world’s largest defense contractor has carried out significant restructuring over the last year, with the acquisition of Sikorsky and the sale of its Information Systems and Global Solutions (IS&GS) business to Leidos. All this change has been carried out in an effort to streamline operations and focus more on what they do best. Such a strategy is bound to bode well for the company in the future.

The F-35 Program Will Continue To Benefit The Company

In the recent past, customer support and demand for the F-35 has increased tremendously. Key milestones in the year included the rollout of the first F-35 aircraft for the Japan Air Self-Defense Force. At present, the company is on track to provide Japan with 42 aircraft for its national defense requirements. Furthermore, Norway has stated its interest to participate in a multiyear, multinational block buy of the F-35. In its 2017 budget, the country has outlined a request to buy 12 F-35 fighters and remains on track to purchase a total of 52 aircraft for its national defense needs.

In addition, the F-35 program is expected to see a massive boost in cash under the Trump Presidency. Despite Trump’s public outcry on Twitter regarding the mounting costs, it is expected that production will carry on without much of a hitch as Lockheed works hard to reduce the cost per plane.

The Air Force had in the past asked the company to bring the cost per plane down to about $85 million. As recently as May this year, Lockheed managed to bring the cost per plane down to just under $100 million (not including the engines), which is a significant drop. The latest bulk purchase by the Pentagon shows that the company has made further progress in this respect. Last month, the Pentagon ordered 90 planes at a price of about $7.2 billion. This brings the cost per plane down to a whopping $80 million. This again is exclusive of engines, however. At present, each engine costs about $16 million, bringing the cost for the complete plane to a grand total of $96 million. Regardless, this a major accomplishment by the company. What it essentially means is that Lockheed has managed to shave off about 20% of the airplane’s cost in just six months.

At present the Pentagon has expressed its need for 1,763 air combat fighters. This number could easily hit the 2,000 mark given Trump’s statements on increasing the overall size of the airforce.

International Sales To Nudge Revenues In The Positive Direction

Over the past two years, Lockheed Martin has worked to try and improve its sales from international customers. The company had previously aimed to expand its focus and footprint overseas in an attempt to achieve 25% of annual sales from international customers. Due to a change in its portfolio content, resulting from the acquisition of Sikorsky and the divesture of IS&GS, the company seems on track to exceed the goal within the year.

In general, international work across all segments is expanding. The increased sales of F-35 Joint Strike Fighter, missile defense systems, C-130J cargo planes and tactical missiles abroad are testament to this fact. Specifically, the company has witnessed demand for its equipment, ranging from C-130J aircraft in France and Germany to helicopters in Poland to missile defense systems in the Asia-Pacific, Europe and Middle East theaters. This demand has greatly benefitted the company as the international portfolio continues to grow faster than the DOD budget.

Additionally, increased international work is also providing Lockheed Martin with greater economies of scale that enhance the company’s ability to improve the affordability of platforms and services to both domestic and international customers. The company now expects to increase international sales to at least 30% of the total annual sales over the next few years.

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