Lockheed Beats on Q1 Earnings, Boosts View - Analyst Blog

The Pentagon's prime contractor, Lockheed Martin Corporation LMT, posted impressive first quarter 2014 earnings before the opening bell amid an uncertain budget environment. The company reported quarterly earnings of $2.87 per share, comfortably surpassing the Zacks Consensus Estimate of $2.52 by 13.9%.

Earnings in the reported quarter also surged 27.6% from $2.25 adjusted profit level in the year-ago quarter. The upcast in earnings was mainly attributable to its strong operational performance. This premier defense contractor remains optimistic about 2014 expecting higher earnings this year.

Operational Highlights

In the reported quarter, total revenue was $10,650 million, failing to meet the Zacks Consensus Estimate of $10,834 million. The quarterly figure also dropped 3.8% from the year-earlier level of $11,070 million. All segments barring Aeronautics experienced a year-over-year decline in revenue.

Lockheed Martin ended the year with $79,600 million of backlog, down 3.6% sequentially. Of this, $26,500 million belonged to the Aeronautics segment and $19,600 million to the Space Systems segment. The rest is made up of $14,400 million for the Missiles and Fire Control segment, $10,900 million for Mission Systems and Training and $8,200 million for Information Systems & Global Solutions.

Segmental Performance

Aeronautics

Aeronautics' quarterly sales increased 6% year over year to $3,386 million. The improvement mainly reflects higher sales related to F-35 production contracts, along with higher sales from C-5 and F-16 programs, partially offset by lower net sales for the C-130 program.

Segmental operating profit nonetheless fell 3.7% year over year to $393 million while operating margin decreased 30 basis points (“bps”) to 11.6%.

Information Systems & Global Solutions

Information Systems & Global Solutions' quarterly sales decreased 9.3% to $1,910 million. The decline reflects lower net sales and completion of certain programs. These negatives were, however, partially offset by the initiation of certain U.S. government IT programs.

Segmental operating profit came in at $174 million, down 7.9% year over year while operating margin increased 10 bps to 9.1% year over year.

Missiles and Fire Control

Missiles and Fire Control segment's quarterly sales dropped 6.1% to $1,867 million. The decrease reflects lower net sales for various technical services programs and for air and missile defense programs.

Segmental operating profit increased 4.1% to $358 million and operating margin expanded 190 bps year over year to 19.2% in the reported quarter.

Mission Systems and Training

Mission Systems and Training segment's quarterly sales declined 11% to $1,628 million from $1,830 million in the year-ago period. The decline reflects lower sales for integrated warfare systems and sensors programs as well as undersea systems programs.

Segmental operating profit rose 24.4% to $250 million while operating margin expanded 440 bps to 15.4%.

Space Systems

Space Systems' segmental sales decreased to $1,859 million in the first quarter from $1,960 million in the comparable period last year. The decline reflects lower net sales for government satellite programs and for the Orion program.

However, segmental operating profit improved 10.4% to $254 million and operating margin climbed to 13.7% from 11.7%.

Financial Condition

Cash and cash equivalents of Lockheed Martin were $3,264 million at quarter end versus $2,617 million at year-end 2013. Long-term debt was $6,152 million, on par with the 2013 level.

The company repurchased 7 million shares at a cost of $1.1 billion in the first quarter. The company disbursed $444 million as dividends in the reported quarter.

Guidance

Lockheed Martin reaffirmed its top-line expectation for 2014 in the range of $44,000 million to $45,500 million, with orders in the $41,500–$43,000 million range. International sales are expected to account for about 20% of 2014 revenue.

The company boosted its bottom-line forecast to the range of $10.50–$10.80 from the earlier expectation of $10.25–$10.55 for 2014. The Zacks Consensus Estimate is pegged at $10.60 for 2014, above the high end of the company's guidance range.

Lockheed also expects higher cash from operations of approximately $4,700 million for the year compared with its previous forecast of $4,600 million.

Outlook

Though Lockheed Martin failed to meet the revenue consensus, it breezed past the bottom-line expectation. Also, the company continued to grow its backlog and generate strong cash from operations while maintaining its cash deployment strategy.

A growing international market for the F-35 Joint Strike Fighter will likely act as a catalyst for this defense prime going forward. Lockheed Martin's pricey F-35 program is expected to gain significant traction in 2014 and 2015.

Although the 2015 Department of Defense (DoD) request for procurement of $90.4 billion is down from the 2014 request of $115.1 billion, it comprises $4.6 billion for 26 F-35 Joint Strike Fighters for 2015, and $31.7 billion for 238 additional Joint Strike Fighters over the next several years. This will definitely trigger significant top-line accretion for the company. Its unique capabilities and operational efficiency have roped in orders not only from the U.S. military forces but also from allied countries.

Admittedly, the stringent budget environment has raised an alarm for the defense companies. However, regular foreign military sales FMS contracts have helped them to withstand uncertain budgetary issues at home. Again, in January this year, the approval of Obama's $1.1 trillion Omnibus spending measure allows the Pentagon to utilize as much as $93 billion for buying weapons and another $63 billion for advancing research and development in the sector. Hence, with a gradually strengthening global economy and the budget issues drawing to a close, the defense majors will likely see stability in 2014.

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 #3 (Hold). Well-ranked defense stocks worth considering include Huntington Ingalls Industries Inc. HII, General Dynamics Corp. GD and Northrop Grumman Corp. NOC. While Huntington Ingalls carries a Zacks Rank #1 (Strong Buy), General Dynamics and Northrop hold a Zacks Rank #2 (Buy).