Tuesday, Lockheed Martin (NYSE:LMT) announced its fourth quarter and full year results for the fiscal year of 2015 and somehow despite recording what seems to be a more than decent year investors reacted harshly; LMT stock dropped by 4.5% in early trading and nearly dropped below the $200 per share mark.
Apparently what sparked the frenzy was Lockheed's decision to merge its Global Solutions and Information Systems unit with Leidos Holding Inc (NYSE:LDOS). The deal will see the Bethesda, Maryland based company receive a one-time payment of $1.8 billion while shareholders will receive 50.5% of the outstanding equity of Leidos on a fully diluted basis with an estimated value of $3.2 billion. Since the announcement Leidos stock has lost 9% of its value.
Market sentiments often tend to make investors doubt their holdings but over I would urge those who hold LMT in their portfolios to maintain it. There are just a few simple reasons:
This last quarter saw Lockheed Martin complete its acquisition of Sikorsky Aircraft Corporation for $9 billion. The acquisition managed to have a relatively small negative impact of $28 million ($0.09 per share) in the net profit for the year and quarter as non recoverable transaction costs associated with the deal nibbled at the bottom line.
The newly added business unit contributed a $15.6 billion backlog to help the company's total backlog swell to a record $99.6 billion. The acquisition has already started to have a positive impact as the company's Mission Systems and Training unit (within which Sikorsky lies) saw its revenue increase by 14% owing mostly to the $400 million brought in by Sikorsky. The loss in operating profitability in the unit was mostly due to one-off events, including the costs of adding Sikorsky to their unit. However in the upcoming fiscal year the company rightfully expects its top line to grow by 7% to 10% as Sikorsky will start to lift the company's financials.
A big part of the future outlook also takes into consideration the ever increasing instability in the Middle East as both Russia and the United States, along with their respective allies, continue to battle ISIS and exert their own influence in the region. America and its allies will need to arm themselves with machinery and weapons which match their Russian counterparts. Even though in most aspects the US exceeds the whole world in, Russia's Mi-24 Hind is still a force to be reckoned with. This surge in demand will most likely be filled by Lockheed and its new business unit, Sikorsky.
The crown jewel of Lockheed Martin, the F-35 Joint Strike Fighter is the company's single most expensive weapons program. The Pentagon alone plans to buy approximately $47.5 billion worth of F-35 fighter jets, while the company also plans to sell as many as 5,100 units of the aircraft in the next six decades. Trying hard to keep up with the rising demand the company sold 45 units of the F-35 in 2015 and plans ramp up production in the upcoming years. In an earnings call the CEO of Lockheed Marillyn Hewson said that she expected planned deliveries of the F-35 to increase to 53 in 2016, 60 units in 2017, and then raising deliveries up to 100 in 2018. Operating profits for the F-35 program increased by $100 million as increasing production rates bring about economies of scale. With numerous countries lined up waiting for their F-35s, and more to join the queue, the company might find it difficult to keep up with orders.
It's important to remember that Lockheed hasn't put all its eggs in one basket. The company also boasts being the producer of the most popular combat aircraft that is not a fighter jet, the C-130 Hercules. Last year the company secured a deal with the US Air Force for 83 C-130s, a deal which should keep them busy till 2020. Remember, this does not include orders from other countries. Although this past year the company recorded a 12.5% drop in deliveries for the Hercules as it delivered 21 units as compared to 24 units in fiscal 2014.
- A Shareholder's Solace
The past few months have seen bourses across the world slip into bearish territory a number of times. Where even the most robust stocks slipped into the red, Lockheed Martin has managed to maintain a great deal of stability. The company's share price is not related to the general market sentiments, instead it depends more on the geo-political atmospheres of the world. So when low crude oil prices, instability in the Chinese economy, and the rising threat of terrorism seem to eat away stock prices, LMT excels under these conditions.In the latest quarter the company repurchased $3.8 billion worth of shares (3.2 million shares for $707 million, and 15.2 million shares for $3.1 billion), and has paid $1.9 billion in dividends during the year ended December 31, 2015. The company has also promised shareholders a $1 billion special dividend (about $13.5 per share), provided the Leidos deal goes through.
Disclosure: I/we 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.