Lockheed Wins Littoral Combat Ship Deal - Analyst Blog

Defense behemoth Lockheed Martin Corp. LMT won a major contract from the Pentagon in its funding list of Mar 10. Of the $1.6 billion worth of contacts dispersed yesterday, Lockheed Martin emerged as the biggest winner with an award valued at $698.9 million.

Lockheed Martin received funding for the construction of two Littoral Combat Ship (LCS). The Naval Sea Systems Command, Washington, D.C., is the contracting authority. This contract calls for Lockheed Martin to perform basic seaframe construction on two LCS, purchase select systems equipment for installation aboard the vessels, and integrate and test this equipment.

The contract – which runs through Aug 2018 – does not cover the full cost of building the LCS. These two vessels are expected to cost somewhere between $400 million to $800 million each upon completion.

An LCS is a type of relatively small surface vessel intended for operations in the littoral zone. These are well designed to tackle rapidly changing global threats and provide a cost-effective solution in the current climate of tight budgets.

Work on the contract will mainly be performed in Marinette, Wis. (56%); Walpole, Mass. (14%); Washington, D.C. (12%); Oldsmar, Fla. (4%); Beloit, Wis. (3%); Moorestown, N.J. (2%); and Minneapolis, Minn. (2%).

Lockheed Martin is the world's largest stand-alone defense contractor with a platform-centric focus and a steady inflow of follow-on orders due to its leveraged presence in the Army, Air Force, Navy and IT programs. The company has succeeded in beating the top as well as the bottom line in its fourth quarter 2013.

Despite the uncertainty plaguing the industry, the company continued to grow its backlog and generate strong cash from operations while maintaining its cash deployment strategy. It has been able to generate $15.4 billion in orders in the fourth quarter of 2013. Going forward, varied product offerings, strong program execution and cost reduction measures will help the company to sustain its profitability.

Lockheed Martin has a Zacks Rank #2 (Buy). Other defense stocks also worth considering are Huntington Ingalls Industries, Inc. HII, Embraer S.A. ERJ and Northrop Grumman Corp. NOC. Huntington Ingalls Industries sports a Zacks Rank #1 (Strong Buy), while Embraer and Northrop Grumman carry a Zacks Rank #2 (Buy).