A 'Messy' Q3 Expected For Lockheed Martin

Wells Fargo expects a “messy” third quarter from Lockheed Martin Corporation LMT and expects the company to cut its 2016 profit view.

The brokerage expects Lockheed Martin to earn $2.93 a share on revenue of $12.7 billion versus consensus of $2.93/$12.1 billion.

Wells Fargo also predicts a reduction in 2016 earnings guidance “due to the IS&GS divestiture to Leidos, a gain on the increased ownership in the Atomic Weapons Establishment (AWE) joint venture, Sikorsky purchase accounting adjustments, and confirmation that the Qatar THAAD order moved to 2017.”

“We estimate Q3 sales will increase 11 percent y/y, as increases in Rotary & Mission Systems (+57 percent — Sikorsky acquisition) and Aeronautics (+7 percent — F-35 volumes) are offset by declines in Space Systems (down 5 percent — lower government satellite activity),” Wells Fargo analysts wrote in a note.

In addition, Lockheed Martin plans to provide initial commentary about revenue, pension FAS/CAS adjustment and operating cash flow expectations for 2017. Investors expect 2017 EPS is likely around $12 (Wells Fargo: $11.85/consensus: $12.60). However, the analysts expect the headwinds to be light as the interest rates are about 10–20 bps higher than when the company provided a pension update in July.

Related Link: Lockheed Martin's Product Portfolio Covers All The Bases

The company is also expected to discuss the long-term impact of freezing its pension plans. Effectively, 2020 is the year that will reflect the full freeze of the defined benefit plan, so FAS pension expense could flip to income that year.

“In total, we would not be surprised to see the FAS/CAS pension income increase by about $2.5 billion or more by 2020 vs. 2016 levels,” the analysts noted.

Wells Fargo also anticipates Lockheed Martin to discuss the DoD approval for about $1 billion in funding to reimburse costs incurred on the F-35 low-rate-initial production (LRIP) lot 9 using an undefinitized contract action (UCA).

In addition, LMT could comment on the potential multi-billion-dollar payment for low-rate initial production (LRIP) 10 that did not appear to happen before the end of third quarter.

Investors should also focus on:

• “The impact of pushing out the THAAD contract to Qatar until 2017.”
• “The slowing development on the new intercontinental ballistic missile (ICBM) program due to uncertainty about cost estimates.”
• “Re-compete for the Three-Dimensional Long-Range Radar (3DELRR).”
• “Request for Proposal for the Joint Surveillance Target Attack Radar System (JSTARS) recapitalization and the Trainer (T-X) programs.”

At the time of writing, shares of Lockheed Martin were down 0.06 percent to $232.94.

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