Lockheed Boosts Asset Portfolio, Seals an Air Force Deal - Analyst Blog

Merger & acquisition activity, which in the U.S. defense sector has been hibernating for the past few years, seems to have finally woken up. This year is seeing some major acquisitions by large defense contractors. Lockheed Martin Corp. LMT happens to be one of the leading players in the acquisition race.

The company announced that it has entered into a definite agreement to acquire Deposition Science Inc., a supplier of thin-film coatings. The to-be-acquired business will merge with its Aeronautics business arm. The purchase is likely to be completed within a month and is subject to customary closing conditions. The details regarding the agreement were undisclosed.

A subsidiary of Advanced Lighting Technologies Inc., Deposition Science utilizes various technologies and processes to manufacture thin film coatings used in industrial applications.

Meanwhile, goods news flowed in at Lockheed Martin's Aeronautics division as it won a $222.9 million Air Force modification contract for lending services to the C-5 Reliability Enhancement and Re-engining Program ("RERP").

The contract involves the installation of proven GE engine and 69 aircraft enhancements to boost reliability, maintenance and availability for expanding the lifecycle of the C-5M fleet through 2040. A total of 11 C-5 aircraft will be refurbished under RERP to improve performance, transportation throughput and payload capacity. The contract will run through Jan 10, 2017.

As for the Deposition Science acquisition, dwindling defense spending and an uncertain future for the industry have pushed contractors like Lockheed to consolidate their operations through acquisitions outside the core military sector. The company, in Mar 2014, struck a deal to buy BEONTRA AG, a provider of integrated planning and demand forecasting tools for airports.

Year to date, Lockheed Martin undertook three major acquisitions which will complement the company's asset portfolio and offer access to new customers and latest technologies. Going forward, we could expect Lockheed to enter into more acquisition deals as the low interest rate environment will act as a catalyst for financing these purchases.

In addition, the current contract win speaks of the company's constant technological innovation efforts. We believe this factor will enable Lockheed to win large-value contracts intermittently amidst the current sequestration. Currently, Lockheed carries a Zacks Rank #2 (Buy). Other well-placed defense operators with a similar rank include Embraer SA ERJ, Leidos Holdings, Inc. LDOS and Curtiss-Wright Corporation CW.