This Could Send LMT Stock Soaring
Lockheed Martin Corporation (NYSE:LMT) continues to win contracts as the defense sector continues to grow. While LMT stock has gained only 2.2% since the start of the year, it has seen an impressive 12.6% growth year-over-year and it is trading at historical highs, comfortably within the $210.00–$220.00 range.
This could just be the beginning for Lockheed Martin stock.
Lockheed Martin’s third-quarter results, reported last October, were remarkable thanks to revenues of $11.5 billion and net earnings of $865 million. (Source: “Lockheed Martin Reports Third Quarter 2015 Results,” Lockheed Martin Corporation, October 20, 2015.) The results are especially noteworthy, considering that in the second quarter, LMT acquired Sikorsky Aircraft from United Technologies for $9.0 billion. Still, Lockheed Martin was able to increase profits by 4.5%, exceeding analysts’ forecasts. (Source: “Lockheed Martin to Buy Sikorsky for $9 Billion,” The Wall Street Journal, July 20, 2015.)
RBC Capital Markets recently upgraded LMT stock from “Sector Perform” to “Outperform.” LMT stock is poised to gain further over the next few days.
Meanwhile, the company recently secured a contract to upgrade the sensor target (M-TADS/PNVS) technology for the U.S. Army’s “AH-64 Apache” helicopter. The contract is small (by defense sector standards) at $54.3 million. Under this contract, Lockheed Martin will produce 35 M-DSA kits for the U.S. army and the Qatari Air Force. This is but one contract in a series signed just over the past few days.
The upgrades concern the Apache’s targeting and pilotage system, the Modernized Target Acquisition Designation Sight/Pilot Night Vision Sensor (M-TADS/PNVS). Apache pilots using the M-TADS/PNVS benefit from long-range and precision engagement capabilities, as well as safer flying characteristics, day or night, in any weather condition.
The initial contract, valid through December 2016, could be extended thanks to four additional one-year options until 2020, for a total five-year contract value potential of $424 million. (Source: “Lockheed Martin receives sensor sustainment contract for the Apache Attack helicopter,” Vertical Magazine, January 6, 2016.)
It should be noted that the Apache should remain in service until 2045, which suggests that Lockheed can expect a number of contracts to upgrade the new platform to ensure the crews can address ever-changing threats.
LMT Stock to Profit from Global Instability
Just before Christmas, Lockheed Martin Corporation announced it won a $1.17-billion contract to buy titanium and other materials needed to build an 11th batch of 80 “F-35” fighter jets for the U.S. and some allied air forces. (Source: “Lockheed wins $1.17 billion deal for early work on more F-35 jets,” Reuters, December 21, 2015.)
The contracts represent a small portion of Lockheed Martin’s revitalized business from rising demand in the defense sector. The company can simply rely on its strength to offer innovations that appeal to the military establishment. Lockheed Martin can even earn revenue by getting contracts to improve existing designs, demonstrating an impressive ability to generate further cash—one of the key advantages of LMT stock.
The recent award of a $28.0-million concurrency modification contract to correct a fuel tank overpressure issue for the “F-35A” fighter using retrofit modifications for the U.S. Air Force and those of Australia, Italy, the Netherlands, and Norway is but the most recent example of this cash-generating ability. (Source: “F-35 Lightning: The Joint Strike Fighter Program,” Defense Industry Daily, January 14, 2016.)
Despite the risk of sequestration—that is, a comprehensive program to cut defense spending—President Barack Obama signed a $1.1-trillion budget full of federal spending on defense (and tax breaks) for fiscal 2016. (Source: “Can Aerospace & Defense ETFs Protect Your Portfolio in 2016?” NASDAQ web site, January 12, 2016.)
Indeed, LMT stock is benefiting from increased military spending due to rising tensions in the Middle East and other regions. Foreign governments are also increasing purchases of U.S. military hardware. (Source: “Defense Stocks get a boost as Middle East tensions rise,” Investors.com, January 12, 2016.) In fact, the U.S. Agency DSCA-Defense Security Cooperation Agency notified Congress of the sale of “Hellfire” missiles to Iraq worth $800 million and Lockheed Martin will serve as the prime contractor. (Source: “U.S approves $800 million sale of Hellfire missiles to Iraq,” Reuters, January 7, 2016.)
Despite fears of cutbacks to defense spending, there is increasing unrest in the Middle East and other regions and terrorism is starting to return to South Asia, as the January 14 attacks in Jakarta suggest. As a result, military leaders and their governments are becoming ever more worried by the asymmetric risks of recent warfare and see a need to adapt defense capabilities to meet the challenges of a different type of adversary.
This need to change military defense strategies is good for LMT stock. After all, the defense sector companies love a good crisis and Lockheed Martin is the Pentagon’s largest military contractor and supplier.