No Need To Get Defensive On Lockheed Martin

By Ryan C. Fuhrmann | May 02, 2012 AAA

Defense giant Lockheed Martin (NYSE:LMT) kicked off its first quarter with decent sales growth, but stellar profit growth. The magnitude of the bottom-line improvement isn't likely to be repeated steadily going forward, but the company should have no problem logging solid returns for shareholders going forward.

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First Quarter Recap
Sales advanced 6% to $11.3 billion. Three out of four of Lockheed's operating segments reported top-line increases. Aeronautics was the largest at nearly a third of total sales and grew a very healthy 17.6% on strong trends for the F-35 and C-103J aircraft. Electronic systems wasn't far behind at 32% of sales, but logged much more modest growth of 3.6%. Growth was attributed to ship and aviation programs. Space systems increased 2.4% to nearly 17% of sales, while information systems was the only laggard as it reported a 2.7% fall in the top line to make up 18% of sales.

Information systems again lagged in terms of profitability and reported a 3.1% fall to $188 million. It was also the only division to report a profit margin below 10%. Electronic systems reported the strongest growth with a 25.2% increase to $541 million. Aeronautics was solid with profit growth of 17.4% to $385 million, while space systems was again modest, growing 4.1% to $226 million.

Backing out corporate overhead, operating profit growth was strong at 16.8% to $1 billion. Backing out modest income tax expense growth, net income jumped 26% to $668 million. Share buybacks boosted earnings by 35.3% to $2.03 per diluted share.

SEE: A Breakdown Of Stock Buybacks

Outlook and Valuation
For the full year, Lockheed expects sales between $45 billion and $46 billion. Analysts project sales between these two figures for an annual decline of almost 2%. Lockheed projects to generate operating profit of up to $4 billion and diluted earnings per share between $7.70 and $7.90. This works out to a modest forward P/E of 11.5. The company expects operating cash flow of at least $3.8 billion that nets out a $1 billion contribution to its pension plan.

The Bottom Line
Despite budgetary pressures to defense budgets and the wind down of operations in Iraq and Afghanistan, Lockheed is managing to keep its profit growth moving steadily forward. Growth going forward won't come close to the double-digit levels of the past decade, but Lockheed, along with archrivals that include Raytheon (NYSE:RTN), Northrop Grumman (NYSE:NOC), L-3 Communications (NYSE:LLL), and aerospace giant Boeing (NYSE:BA), will continue to dominate the domestic industry and grow modestly with overseas allies of the United States. Lockheed's above-average dividend yield of 4.4% is also quite appealing.

SEE: 5 Must-Have Metrics For Value Investors

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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