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.