Why To Invest In Lockheed Martin Corporation

Feb.26.14 | About: Lockheed Martin (LMT)

Lockheed Martin Corporation (NYSE:LMT) is a security and aerospace company involved in the research, design, development, manufacture, integration, and maintenance of innovative technology systems and products.

The company anticipates its FY 2014 net sales to fall slightly from the net sales recorded in FY 2013. Therefore, I will determine the revenue outlook of the top two revenue generating segments of the company in this write-up. I will begin by identifying the two major revenue driving segments of the company and analyze the performance of those segments during FY 2013. I will determine the prospects of revenue growth of those segments along with a discussion about some of the latest events that will benefit the company's overall top line.

Let us begin with analyzing the historical top-line performance of the company's two leading segments.

Top-line Analysis

Source: LMT 2013 10K

The chart above shows that the company's aeronautics business segment is a major contributor to the company's total revenue. The segment improved its contribution to the company's total revenue from 30.89% in FY 2011 to 31.14% in FY 2013 but the segment recorded a 5.55% decline in its revenue in FY 2013 due to a decline in aircraft deliveries during the year. The company anticipates higher net sales from this segment in FY 2014, so I will determine the major revenue growth driver of this segment in the following heading.

The company's IS&GS segment contributed 18.45% to the company's total revenue in FY 2013. The revenue from the information systems and global solutions declined by 5.41% in FY 2013 due to a fall in volume and the completion of several programs run under this segment. The company projects further decline in the revenue generated by this segment in FY 2014 as well. Therefore, I will consider what will drive or hinder the revenue growth of this segment in the coming year.

Backlog and Segments' Revenue Growth Drivers

Source: LMT 2013 10K

The table above shows that the company's backlog for two of the major revenue driving segments recorded a year-over-year decline from FY 2011 to 2013. This was mainly because of a decline in orders for fighter jets such as F-16, C-5 and C-130 partially offset by higher orders for F-35. A downturn in the federal information technology budgets contributed to lower orders for the company's IS&GS's programs.

Overall, the company had a backlog worth $82.6 billion by December 31st, 2013 compared to $82.3 billion by December 31st, 2012. Backlog is converted into sales in future periods as work is executed or deliveries are made. About $35.4 billion, or 43%, of the company's backlog by December 31st, 2013 is anticipated by the company to be converted into sales in FY 2014.

Aeronautics: More demand for F-35

The F-35 program generated 50% of the company's aeronautics segment's net sales and 16% of the company's total net sales in FY 2013, and the company expects higher sales for the jet in the coming years. However, the company aims to generate more sales of this jet from international interests. The company's F-35 jet is attracting significant interest from the Gulf region as observed by the Pentagon. More buyers such as the UAE are now considering purchasing F-35s in addition to orders placed by other gulf countries such as Turkey and Israel. Japan and South Korea are also striving to strength their defense, so they also have ordered the jet. This depth of interest in the F-35 from the Gulf was surprising for the U.S. The F-35 project is the most expensive Pentagon defense program in history, and the company will reap its benefits in the coming years.

Information Systems and Solutions- U.S. Budget Issues

On January 17th, 2014, the U.S. Government passed its GFY 2014. This budget provides discretionary defense spending at levels consistent with the planned defense spending limits in the Bipartisan Budget Act and reduced much of the uncertainty and inefficiency in procuring products and services under the persistent resolution.

The planned defense budget cut has a direct impact on the U.S. government's defense spending and is a function of the country's fiscal and economic challenges. But now since the U.S. economy was forecasted to show a bit of recovery in FY 2013, these defense spending and budget constrains may cool down a bit. Moreover, companies such as Lockheed Martin that are directly affected by these budget cuts have room to reap the benefit of their international expansion through making sales to other countries. These countries include South Korea and Japan who are increasing their spending budgets for defense. Currently the company generates 17% of its net sales from its international clients.

Acquisition in FY 2013 to Avail International Opportunities

The company paid $269 million and $259 million in FY 2013 and FY 2012, respectively, for acquisition activities, mainly related to the acquisition of businesses. In 2013, the company acquired Amor Group, a United Kingdom-based company specializing in information technology, civil government services, and the energy market. This acquisition is aligned with the company's strategy to grow international sales and has become a part of the company's IS&GS business segment. This acquisition is likely to bring synergies for the company and reduce the company's IS&GS segment's exposure to the U.S. market that will be hurt by defense budget cuts.

Other Developments, Contracts and Agreement

US Army Interested in New Technology

Lockheed Martin has launched technology that will enable AH-64 Apache helicopter pilots to see targets and view surveillance data in high-resolution color rather than in the vague black and white images they use now.

These new sensors developed by Lockheed Martin took four years to develop and could help pilots to avoid blunders such as an attack on an Iraqi wedding in 2007 when 12 people were mistakenly killed because they were viewed as armed protestors. The additional situational awareness provided by this technology will offer soldiers what they require to make the right decisions on the battlefield. This equipment would be the most innovative on any rotorcraft used by the army though some Special Forces units have similar equipment.

Lockheed Martin and the army need to discuss a contract for the upgrading of all its 680 Apache E-model choppers. This technology with new sensors will help pilots track suspicious cars identified by troops on the ground by their color or even individuals marked in specific clothes. Orders to install this technology in the current fleet of aeronautic vehicles will bring more revenue for Lockheed Martin.

My take Regarding these Updates

The future outlook for the revenue growth of the two major revenue generating segments of the company seems bright. This is because of the new technology and innovation that the company is bringing. The volume of the aeronautics segment is likely to get support from rising demand and orders for the company's F-35. The company's IS&GS segment, which is the second largest contributor to the company's total revenue, will recover its revenue performance from international expansion, while the U.S. defense budget cut will remain a headwind for the segment's revenue growth. The company has made acquisitions in FY 2013 that will assist in expanding the company's global footprint. The upgraded surveillance technology unveiled by the company will also bring new orders and revenue for the company. Therefore, I am optimistic about the growth of the company's two major revenue driving segments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article