Maritime Systems and Sensors unit is a part of the company’s Electronic Systems segment. The business unit provides ship systems integration, including command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) solutions; surface ship and submarine combat systems; sea-based missile defense systems; etc. Core programs include the Aegis Weapon System, which is a fleet defense system and a sea-based element of the U.S. missile defense system, and the Littoral Combat Ship, which is a surface combatant designed to operate in shallow waters.
In the second quarter of 2010, Electronic Systems sales increased 4% year over year to $3.5 billion due to higher sales volume on simulation & training, air defense and certain tactical missile programs. Segmental operating profit increased by 2% to $432 million mainly was due to improved performance backed by certain tactical missile programs and fire control systems. This was partially offset by lower operating profit on air defense programs. Overall operating margin fell 30 basis points year over year to 12.2% in the second quarter of 2010. The company finished the first half of 2010 with a segmental order backlog of $21.9 billion.
Lockheed Martin remains a key player within the military space and continues to benefit from strong defense spending. The company’s customer base includes the U.S. Government, foreign governments and other commercial buyers. Lockheed’s traditional defense focus appears strong, with increasing interest from domestic and international customers.
However, we believe all the abovementioned positives have been considered in the current share price of Lockheed Martin, which dropped approximately 3.6% over the past month. This justifies the Zacks #3 Rank, which translates into a short-term “Hold” recommendation. However the dull performance was across the board, with its peers like The Boeing Company (BA) loosing approximately 6% over the past month while General Dynamics Corporation (GD) plunged about 7%.
The downside in the value of defense big shots is an extension of the tepid recovery rate of the U.S. economy, raising fears of another axe on defense. GDP growth averaged 3% in the first half of 2010, but decelerated sharply to 2.4% over the second quarter of 2010. Zacks forecast of GDP growth for the second half of 2010 is now at about 2.8%. We now see greater downside risks to our GDP forecast for the second half of 2010, but still expect decent growth and a slowly declining unemployment rate.
Overall, considering Lockheed Martin’s business model and fundamentals, we retain a long-term “Neutral” recommendation on the stock.
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