Lockheed Martin Corporation (LMT), the defense industry goliath, humbled market apprehensions on April 21 with its first quarter 2010 results. The company, however, revised downward its fiscal 2010 earnings range to $7.00 – $7.20 from the earlier guidance range of $7.15 – $7.35.
The market reaction was mostly positive as judged from the response of analysts covering Lockheed Martin. The upside was mostly fueled by the strong defense outlays through 2010 – 11, debt repayment, solid operating results, and an ongoing share repurchase program.
Earnings Report Review
Lockheed Martin topped the Zacks Consensus estimate of $1.35 with an EPS of $1.45 in the first quarter of fiscal 2010. In the reported quarter, earnings were affected by the elimination of the tax deduction for Medicare benefit costs reimbursed. This charge decreased net earnings by $96 million, or 25 cents per share.
Lockheed Martin also fueled its EPS growth through a lower number of outstanding shares, which decreased to 377.7 million from 397.5 million in the year-ago quarter.
A pension accounting adjustment also negated $110 million in the quarter, $4 million less than the year-ago quarter.
On the revenue front, Lockheed Martin reported quarterly net sales of $10.6 billion, a 3% increase over $10.4 billion in the year-ago quarter. The upside in sales year-over-year came from higher numbers from the Aeronautics and Information Systems & Global Services (IS&GS) segments, which grew by 5% and 4% respectively. Of the rest, Electronics Systems (ES) and Space Systems segments remained steady.
(Read our full coverage on this earnings report: Lockheed Topples Estimates)
Agreement of Analysts
Over the last 30 days, out of the 20 analysts covering the stock, 8 have raised their estimates for fiscal 2010 while 3 have lifted the fiscal 2011 earnings estimates.
Lockheed Martin’s better-than-expected results and its status as the largest U.S. defense contractor seem to be the driving factor for the positive estimate revisions. Despite the above positives, one analyst has downwardly revised his/her estimate for fiscal 2010, while 4 analysts reduced their fiscal 2011 estimates. Such a downward revision clearly depicts the analysts’ worry about a shrinking order backlog base and lower margins.
Magnitude of Estimate Revisions
Lockheed Martin’s first quarter beat, however, failed to allay market trepidations about potential cutbacks for its large programs like the C-130J and Joint Strike Fighter. Any future concerns about the U.S federal deficit may have an adverse affect on defense spending, especially on Lockheed Martin’s high-cost platform programs. Also, Lockheed carries a sizeable pension liability. The company’s operating earnings and future cash flows can be affected by higher pension costs in lower interest rate environments.
Looking at estimate revisions for the ongoing quarter, only a cent decreased over the last two months. Currently the quarterly Zacks Estimate stands at $1.78. However, strong earnings in the first quarter stemmed the tide for the current quarterly estimate. The major beneficiary has been the fiscal 2010 Zacks Consensus Estimate which climbed to $7.27 over the last 30 days.
Reiterate Neutral
Lockheed Martin will continue to benefit from higher defense spending. The core defense budget for fiscal year 2010 and 2011 outlined a ceiling of $531 billion and $549 billion, respectively, or growth of approximately 4% above the fiscal 2009 budget.
Also, the budget focuses on Lockheed Martin programs like the F-35 Lightning II Joint Strike Fighter program, the Advanced Extremely High Frequency (AEHF) satellite program, the Littoral Combat Ship (LCS) program, the Aegis Weapons System and the Terminal High Altitude Area Defense (THAAD) system.
Going forward, we believe Lockheed Martin has significant upside potential based on the Obama Administration’s focus on Smart Power application and cyber security. Lockheed Martin finished the first quarter of fiscal 2010 with $75 billion in backlog, of which $26 billion belonged to the Aeronautics segment and $21.1 billion to the ES segment.
However we believe all the above-mentioned positives have already been taken into account in the current share price. This justifies the Zacks #3 Rank, which translates into a short-term “Hold” recommendation.
Considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.
Read the full analyst report on “LMT”
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