Lockheed Wins Modification Deal for AEGIS Ballistic Missile

Defense giant Lockheed Martin Corp.'s LMT business segment, Rotary and Mission Systems, has clinched a modification contract to provide support for advanced concept initiatives by the Aegis Ballistic Missile Defense ABMD program office. This, in turn, will aid in identifying technology for initiation of present and future ABMD baselines and upgrades.

Valued at $20 million, this contract was awarded by the Missile Defense Agency, Dahlgren, VA. It includes option, which if exercised earlier, would have expanded the cumulative value of this deal to $2.5 billion. With the recent modification, the cumulative value will become $2.6 billion on exercise of option.

Work related to this deal will be carried out in Moorestown, NJ. The contract will use fiscal 2017 research, development, test and evaluation funds to complete the work by Oct 27, 2019.

A Brief Note on ABMD

Lockheed Martin's AEGIS Ballistic Missile Defense ABMD is the naval component of the U.S. Missile Defense Agency's (MDA) Ballistic Missile Defense System (BMDS). The computer-based command and decision element is the core of the AEGIS combat system. At the heart of the system is the AN/SPY-1, an advanced, automatic detect and track, multi-function phased-array radar.

It is the world's only maritime BMDS that can simultaneously attack land targets, submarines and surface ships while protecting the fleet against aircraft, cruise missiles and ballistic missiles. Over time, the AEGIS combat system has evolved, with new capabilities to counter emerging threats and leverage new technologies. Its latest configuration, Baseline 9, offers an open architecture framework to allow extreme flexibility.

In Aug 2016, Lockheed Martin had announced plans to expand the global AEGIS fleet in the U.S., Japan and the Republic of Korea, under a $490 million deal to bring integrated air and missile defense (IAMD) capabilities to new destroyers. These ships will be equipped with Aegis Baseline 9, capable of IAMD. As of Jan 2017, 84 U.S. Navy ships were in service with the AEGIS Weapons System installed.

Our View

Lockheed Martin's Rotary and Mission Systems business carries out some of the company's high-profile programs, including the Aegis Combat System, Littoral Combat Ship, MH-60 helicopter avionics, along with military and commercial orders. It generated revenues of $3.1 billion in the first quarter of 2017, reflecting 28% of its total revenue.

Moving ahead, the company's improved cash outlook for 2017 reflects enhanced cash performance at the Rotary and Mission Systems division. That said, the aforementioned contract gain has the potential to further boost revenues of this business division.

Currently, Lockheed Martin's Aegis system is the maritime weapon system of choice for six powerful nations. Considering this and the above mentioned developments, we expect the latest contract to help management successfully attain the sales target for the division.

Price Movement

Lockheed Martin's stock was up about 18.8% in the last one year, underperforming the Zacks categorized Aerospace/Defense industry's gain of 28.4%. This could be because the earlier budget cuts have put pressure on the top line, although the present defense budget is more in favor of the sector. Budget deficits and political uncertainty make future defense budgets vulnerable to cutbacks. As a result, Lockheed Martin's performance lagged the likes of General Dynamics Corp. GD, Textron, Inc. TXT and The Boeing Co. BA that have outperformed the industry.

Zacks Rank

Lockheed Martin currently has a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here. 

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