Lockheed Martin's Q3 Defends Bullish Case On This Stable Yield Story

Baird recommends to stay long on Lockheed Martin Corporation LMT as it's impressed with the company’s cash flow outlook more than the solid quarterly results.

Lockheed, the defense industry bellwether, expects to generate in excess of $15 billion in cash flow during 2017-2019, including pension contributions of $1.5-$2 billion.

“We are forecasting 2017 FCF to exceed $4.5 billion, or over $16.00 per share and 2018 FCF to hit $5.0 billion, or $18.00+ per share vs. $13.22 in 2015,” analyst Peter Arment wrote in a note.

Lockheed reported third quarter EPS of $3.61, which included a $0.27 per share net benefit. Excluding the benefit, EPS from continuing operations was $3.34, $0.37 above the Street.

Moreover, Arment noted the company’s initial outlook on 2017 "was better than the consensus feared" on pension income totaling $800 million versus Baird’s estimate of $818 million.

Meanwhile, Arment raised his 2016 EPS estimate by $0.08 to $12.18 to reflect earnings post the spin-off of IS&GS and the one-time gain in the third quarter. However, he cut his 2017 EPS estimate by $0.50 to $12.50 to account for the slightly lower pension income and softer margin profile in Aeronautics and Space.

That said, Lockheed’s long-term growth is tied to the F-35, which represents about 21 percent of total company sales. The company delivered 45 F-35s in 2015, with production ramping toward over 100 annual deliveries by 2020.

“The significant growth of the F-35 production is the reason why LMT’s revenues over the long term can likely de-couple to the upside from the baseline growth of the DoD Budget,” Arment added.

Arment reiterated his Outperform rating and $284 target price.