Lockheed Martin

  • US military and aerospace defense   contractor, Lockheed Martin, reported better-than-expected quarterly earnings   this week, but lowered its sales outlook for the year due to supply chain   delays.

  • US defense firms, especially aircraft   makers, are reliant on Mexican suppliers that have been closed due to the   Covid-19 outbreak.

  • Revenue for Q1 rose 9.2% to $15.65 billion,   beating analysts’ estimates of $15.08 billion. Net profit rose 1.8% to $1.72   billion, or $6.08 per share for the period ended March 29. Consensus   forecasts were for $5.80 of earnings per share.

  • The higher-than-expected profit was in part   due to a 14% increase in its aeronautics segment, which produces F-35 fighter   jets. The aeronautics segment contributes around 40% of the company’s annual   sales and saw operating margins improve 10 basis points to 10%. It’s the same   division Lockheed trimmed its sales outlook for, because of the supply-chain   issues from Mexico. The company delivered its 500th F-35 aircraft during the   quarter. It also has a backlog of more than 3,300 F-35s - the most expensive   piece of military equipment in the US budget.

  • The Rotary & Mission Systems business   had flat sales, and the operating margin fell 10 basis points to 10%.

  • Sales for the Missiles & Fire Control   division improved 11.4%, with the operating margin falling to 15.1%.

  • The Space business grew 10.5%   year-over-year, with higher sales of strategic and missile defense systems,   especially in the areas of hypersonic and ballistic missiles, being the main   contributor to growth in the quarter. Operating margins came in at 9.6%.

  • The sector in which Lockheed Martin operates is likely to be mostly shielded from coronavirus-related disruptions thanks to its stable cash flows. For example the Pentagon recently increased interim   payments to defense contractors, and is also paying sick leave. This is not the case for many businesses in the US industrial market. However, while the   initial $1 billion in relief funds for the industry has been helpful, the   Pentagon will still need to receive additional relief funds in the future.

  • Despite Lockheed guiding sales to between   0.4% and 0.8% lower, the company left its 2020 earnings per share forecast,   of it being up 8.4% to $23.80, unchanged - the midpoint of the range.

  • Lockheed Martin is largest defense   contractor in the world, and one of very few key military contractors. That   amount of red tape and top secret clearance forms a wide moat (no pun   intended) around this defense business.

  • On a 2.55% dividend yield (which is 40 basis points higher than the average yield of the S&P 500), and with the   company having compounded its dividend by 13% over the last 10 years, it remains a very attractive defensive option for portfolios. The dividend is   well-covered and the company generates strong free-cash flows. It also has an   order pipeline worth an eye-watering $144 billion (Over 2 years’ worth of Q1   sales). Even though the current share price has it on 17x earnings, one is   really paying for a quality business that is best of breed.

Lockheed Martin