Lockheed Martin (LMT) has had a good 2012 and I believe the defense contractor is in a good position to continue that streak into 2013. There are a couple very good reasons for this.
Multi-billion Dollar Defense Contract
One of the bright things LMT has going for it is contracts with the Defense Department it picked up for an additional 31 F-35 jets and the last two (of six) military communications satellites worth up to $5.6 billion. This is a good reason to continue to invest in Lockheed Martin because these contracts are immune from the automatic budget cuts. In 2013 spending cuts and tax increases are supposed to take place and contracts awarded before 2013 will not be reduced so the company is sitting in a good position. Some important aspects to understand about this contract:
- A $1.93 billion contract for the final two Advanced Extremely High Frequency (AEHF) satellites in a constellation of six.
- Unit's contract for a sixth installment of F-35s can't exceed $3.67 billion when its final details are hammered out next year.
- The company will not be paid $3.67 billion to Lockheed Martin
- It sets a threshold target and obligates an unspecified amount to begin assembly of the 32 conventional U.S. aircraft.
CDL Systems Acquisition will Expand Lockheed's Abilities
CDL Systems is a software company that specializes in the development of vehicle station control software for unmanned vehicles. Lockheed Martin acquired all its assets. How is this beneficial for LMT? CLD System's software has already been integrated into numerous unmanned vehicle platforms and designed on low-cost, interoperable, and open architecture systems to support government and civil applications around the world. This gives LMT the ability to work with clients who are interested in the growing trend of unmanned vehicle abilities.
What looked like a possible trend reversal ended up turning into a consolidation period. Back in mid August, the beginning of a negative divergence can be seen in both the RSI indicator and the MACD this usually is a strong argument for a trend change but it didn't happen. Instead the consolidation phase appears to have formed an ascending triangular pattern. If you are unfamiliar, an ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern. There are instances when ascending triangles form as reversal patterns at the end of a downtrend, but they are typically continuation patterns. With the Bollinger Bands moving sideways one would wait for a breakout and then invest in the stock.
The Options Play
The stock is presently trading at 91.34 and I expect the stock to continue to move up. For this reason I would suggest a short term income strategy using a Bull Call Spread.
- Buy a March 2013 call with a strike of '92.50' (priced at $3.00)
- Sell a March 2013 call with a strike of '95.0' (priced at $1.90)
- Net Debit to Start: $1.10
- Maximum Profit: $1.40
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Ascending Triangular formation tends to signal a continued bullish trend after consolidation.
- New contracts will keep profits (and hopefully earnings) steady.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.