Lockheed: Still An Investor's Haven?

Nov. 3.13 | About: Lockheed Martin (LMT)

Lockheed Martin (LMT) announced its third quarter earnings report of fiscal year 2013, reporting net earnings increase of 16% to $842 million. The growth in its missiles and fire control segment and international business were responsible for this growth. Further, the company expects to bolster its missile and fire control segment with a contract from the U.A.E and the U.S. defense agency. Lockheed also expects to expand its international business with its global expansion strategy. The company receives more than 80% of its sales from the U.S. government. Since the government cut the defense spending budget, growing its international business is crucial for Lockheed.

Booming with missiles

During the nine months ending on September 20, 2013, Lockheed's missiles and fire control segment accounted for 17.84% of the company's net sales. Lockheed received a $3.9 billion contract from the U.S. defense agency and the U.A.E on September 23, 2013, contributing to the segment's growth. Under this contract, the company is expected to produce elements of the 'Terminal High Altitude Defense', or THAAD.

THAAD is a U.S. Army system designed to demolish the missiles. The elements used by THAAD for such missiles are interceptors, radars, and fire control systems. Under the contract, Lockheed is expected to manufacture around 110 interceptors for the U.S. Army. For the U.A.E., Lockheed will manufacture and deliver missiles and system equipment.

Regarding the vitality of this contract, Mathew Joyce, vice president and program manager for THAAD at Lockheed Martin, stated, "We continue to see strong interest from around the globe for the unique capabilities THAAD can provide."

The missiles and fire control segment grew 8.53% year over year during the first nine months of this year. Due to this contract, we expect this segment's contribution to further increase, and the growth rate will persist in the next fiscal year.

International deal

Under an international defense deal, South Korea's defense agency placed a RFP for 60 fighter jets in August 2013. Three aerospace giants submitted proposals to manufacture these fighter jets including Lockheed, Boeing (BA), and European Aeronautic, Defense & Space Company, or EADS. In the first bidding round, Lockheed and EADS presented bids that were higher than the proposed budget by South Korea's defense agency; consequently, both companies were out of the bidding competition. This left Boeing as the potential bidder. However, on September 24, 2013 Boeing also lost this contract of $7.7 billion, as South Korea didn't consider Boeing's fighter jets F-15 'advanced' enough to counter North Korea's nuclear threat.

The removal of Boeing from the contract for fighter jets opened the window of opportunity for Lockheed to present its F-35 fighter jets at a lower cost to South Korea, to clinch the contract. Lockheed already has orders from Britain, Australia, Italy, Norway, Israel, and Japan for its F-35 fighter jets. With the large number of orders lined up, Lockheed's production of fighter jets will increase. Consequently, Lockheed might lower its cost for F-35 jets, which would strengthen it proposal in the second bidding round for the South Korea contract. If it wins this bid, Lockheed will boost its international sales.

Lockheed's international business will further receive boost with its global expansion plan under which it acquired Amor Group, which we discussed in detail in our previous article. The international business currently accounts for 15% of the company's total sales, and it expects this to rise to 20% in next few years. We feel that with the above discussed developments in the international business, the company is well positioned to raise this revenue contribution. Moreover, with the growth in international sales, Lockheed will be able to offset the effects from the defense cuts by the U.S. government.

Attractive stock

Lockheed's stock looks attractive with its share repurchase program and hike in dividend. During the first nine months of this year, the company repurchased shares worth $1.5 billion. On September 26, 2013, Lockheed increased its amount for share repurchase by $3 billion. Lockheed's stock is currently trading around $133, and the share repurchase program will further incline this stock price. Besides the increase in amount for share repurchase, the company also announced to raise its quarterly dividend by 16% to $1.33 per share. This dividend is expected to be paid to shareholders on December 27, 2013. These prospects make Lockheed's stock an attractive investment opportunity.

Another company in the aerospace defense industry is Northrop Grumman (NOC), which also increased its amount for share repurchase. Under its share repurchase program, Northrop Grumman repurchased shares for $1.7 billion, year to date. The company authorized an additional $4 billion for repurchasing its shares. To attract investors, the company plans to repurchase around 25% of its total outstanding shares by the end of 2015.

Northrop Grumman's stock price is also expected to rise, attributed to the ten contracts it received from the U.S. Department of Defense, or DoD. Under one of these ten contracts, the company is expected to provide logistic support to the aircraft of the Army. This contract is for $795.9 million and will run through September 30, 2015. DoD disbursed around 113 contracts for $10.92 billion, out of which 9% were awarded to Northrop Grumman. Consequently, these contracts are expected to generate revenue of $982.8 million for the company. The fundamentals and share repurchase program of Northrop Grumman are expected to incline its stock price in the long run.

Stock Valuation

Along with strong fundamentals, Lockheed's stock valuation parameters also support its stock. The trailing twelve months price to earnings, or PE, ratio of Lockheed is 14.97, higher than the forward PE ratio of 13.8, implying that the earnings of the company will increase going forward. This trailing twelve months PE ratio is also lower than the industry's PE ratio of 22.2. The company's dividend yield of 3.98% also favors the growth prospect of its stock and is significantly higher than the industry's dividend yield of 1.9%.

Conclusion

Lockheed's fundamentals are strong, as it expects to grow sales in its various segments like missile and fire control and international business. Compiling our current discussion and previous article on Lockheed, we expect that its international business will grow, despite defense cuts by the U.S. government. The fundamentals of Lockheed are well supported by its strong valuation parameters. Considering all the growth factors, we expect Lockheed to grow in the long term, and investors should consider including it in their portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.