As I look a Lockheed Martin Corp (LMT) and the atmosphere on world markets as well as at home, I am compelled to look at the company and wonder how it will perform over the next year or more. I see two things happening to the company that provide me with two different reasons and strategies to invest in the company. And both reason are because of its government contracts.
Lockheed Martin Corp., headquartered in Bethesda, Md., Lockheed Martin is a global security and aerospace company that employs about 123,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services.
Steady Income from Government Defense Work
As a high tech producer, Lockheed has millions in government contracts that will keep income coming in. In the last week alone there were three examples of the types of contracts this company lands with the government.
$237 Million for F-35 Work
Won $237 million in extra funding for a fourth batch of F-35 Joint Strike Fighters. There were some changes that were to be made to the hardware and software of the stealthy, supersonic new warplanes. This modification increases the cap on retrofits needed on early production planes. In the extensive testing of the planes, issues arose and the Defense Department needed to make certain changes on the new jets.
Extensive testing is done on these jets. Just this March, the F-35 Lightning II flight test program completed 123 test flights totaling 223 flight hours. This is approximately 25 percent of the SDD program's entire testing. It is this thorough testing program that modifications are learned about.
Littoral Combat Ship Deliveries
USS Fort Worth (LCS 3), successfully completed its U.S. Navy acceptance trials and is expected to be delivered this summer. The trials were conducted in Lake Michigan recently. It included a four-hour full-power run and both surface and air detect-to-engage demonstrations of the ship's combat management system. This is the second ship in this class and Lockheed continues to learn and build them faster and more cost effectively with each one.
$391 Million Counter Fire Target Acquisition Radars
This radar system will provide soldiers with enhanced 360-degree protection from rocket, mortar and artillery fire. The Q-53 (as it is called) has been battlefield-proven by the U.S. Army in Iraq and Afghanistan. The radar detects, classifies and tracks enemy indirect fire while it is mounted on a five-ton truck and can be rapidly deployed.
These are just three examples of the high tech contracts the company gets with the Department of Defense. And these contracts will keep coming which makes my first investment strategy dependable. Lockheed also pays a nice 4.6% forward dividend (taken from Yahoo finance). The company continues to work on cutting costs and smarter. This is a good investment for an income investor.
Challenges could see the Stock Slow Down
At the same time, with the wars in Iran and Afghanistan winding down and the Defense Department tightening its spending purse, Lockheed will feel the pinch. Matthew Potter of Seeking Alpha wrote great article on the company and mentioned some of the challenges the company will be facing:
"Revenue and profit will be reduced from the recent past when the U.S. and its Allies were spending billions on the fighting in Iraq and Afghanistan. Many are trying to adjust to the new market by reducing costs including those related to personnel like health insurance and pensions."
These challenges lead to my second strategy which would be short option income strategies while defense contractors struggle to cut costs and maintain profitability in a shrinking industry.
(Click to enlarge)
The Options Play
- Buy a September 2012 put with a '75' strike (prices at $3.80)
- Sell a September 2012 put with a '72.5' strike (priced at $2.75)
- Net Debit to Start: $1.05
- Maximum Profit: $1.45
Reasoning behind the Trade
- Lockheed is presently in a bearish trend it looks like.
- A shrinking defense industry will provide no great reason tog et excited about the stock moving way up.
- A negative divergence exists within the RSI indicator showing weakness in any continued bullish move.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
