Lockheed Martin Keeps Cash Flow Moving Forward

By Ryan C. Fuhrmann | April 29, 2011 AAA

Defense spending cutbacks continue to be discussed in the government, but so far this year the share prices of the leading defense firm have moved impressively upward. Lockheed Martin's (NYSE:LMT) performance has been no exception, and despite top-line challenges, it should be able to grow cash flows, to the benefit of loyal shareholders.
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First Quarter Recap
Net sales rose modestly, increasing 2.9% to $10.6 billion. Sales rose 8% in the aeronautics division and accounted for 29.9% of the total top line on an increase in C-130 transport aircraft deliveries and F-35 combat aircraft volume. Electronic systems reported a 6% increase to make up 32.5% of sales on higher volume for radar systems and increased logistics activities. Sales fell 4% in both the information systems and space systems units, which accounted for 20.2% and 17.3% of sales, respectively as a system that supported the taking of the U.S. census and systems supporting the space shuttle program wound down.

Total operating profit fell 9.2% as flat aeronautics profits, a 2% decline in information systems, and a nearly 75% increase in corporate expenses more than offset positive operating income growth in electronic and space systems. Lower income taxes helped offset the lower operating profitability and net income fell only 0.6% to $530 million. Share buybacks helped send earnings up 6.4% for reported earnings of $1.50 per diluted share. (For related reading, see A Breakdown Of Stock Buybacks)

Outlook
Management currently projects full-year sales between $45,750 million and $47,250 million that would represent annual growth of about 3.2%, if it hits the high end of its guidance. It sees earnings from continuing operations in a range of $6.95 and $7.25 per diluted share. It also expects to generate about $4.1 billion in operating cash flow that would represent year-over-year growth of approximately 15.6%.

Bottom Line
So far this year, shares of Lockheed Martin have rallied strongly and are up about 12%. This is well ahead of the market's return of around 7% and above defense rivals including Raytheon (NYSE:RTN) and Northrop Grumman (NYSE:NOC). Rival L-3 Communications (NYSE:LLL) has had slightly better performance while aerospace competitor Boeing (NYSE:BA) leads the pack with a more than 15% return so far in 2011.

Overall, this is solid performance given the pressure on the government to rein in spending. Defense cutbacks will continue to be part of the operating equation for the foreseeable future and means the major players will also rely on cost cutting to keep their bottom lines moving forward. Despite the sales challenges and recent stock gain, Lockheed should be able to keep growing profits and trades at a reasonable forward P/E below 11. The forward free cash flow multiple looks even more reasonable at just over 9. Throw in a current dividend yield of 3.9%, and investors can reasonably expect double-digit total returns over the next few years.

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