Lockheed Martin Held in Balance - Analyst Blog

On May 19, 2014, we issued an updated research report on Lockheed Martin Corp. LMT. The U.S. Department of Defense's (DoD) No. 1 contractor not only posted strong first quarter 2014 results but also seems to be on a wining spree clinching both big and small contracts from the Pentagon's order book.

Though the company failed to meet the revenue consensus in the first quarter, it continued to grow its backlog and generate strong cash from operations. This helped Lockheed to sustain its cash deployment strategy. Its first quarter operating margin was its highest ever, buoyed by solid, broad-based program execution and restructuring benefits, resulting in 27.6% year-over-year earnings per share/EPS growth.

The encouraging numbers led management to raise its operating profit, EPS and cash from operations forecast. A key catalyst for Lockheed is its F-35 program, which generated 16% of total consolidated net sales in the first quarter. The international mix is also expected to rise to 20% of total sales in 2014.

Product innovation and diversified operations have enabled Lockheed Martin to win meaty orders even in the face of a tepid budget environment.

Management is also prudent to return a substantial portion of its free cash flow to shareholders through share repurchases and incremental dividends. First quarter 2014 free cash flow was a record $2.0 billion of which 78% or $1.6 billion was returned to shareholders. Lockheed repurchased 7.0 million shares for $1.1 billion in the first quarter. The balance was used for dividend payments.

The Street reacted favorably to Lockheed's solid earnings release. Over the past 30 days, all the 14 estimates were revised upwards for 2014. This led to a significant increase of 38 cents in the Zacks Consensus Estimate for the year, which now stands at $10.98. The company forecasts earnings per share in the range of $10.50 to $10.80 for 2014.

In spite of positive estimate revisions for the company, the sector will still face some headwinds from Pentagon's moderated spending levels. Lockheed Martin expects 2014 revenues in the range of $44.0 billion to $45.0 billion (compared with $45.4 billion in 2013). Hence, the top-line forecast is certainly a concern. Again, total backlog decreased 4% sequentially to $79.6 billion in the first quarter.

Lockheed Martin currently carries a Zacks Rank #2 (Buy). Other defense stocks also worth considering are The Boeing Co. BA, Embraer SA ERJ and Huntington Ingalls Industries, Inc. HII, all with a Zacks Rank #2 (Buy).