Pentagon’s largest contractor, Lockheed Martin Corp. (LMT) won a modification contract to fund one C-130J aircraft (#4), advance (long-lead) procurement of aircraft five and six, and external fuel tank modification kits for Israel.
This foreign military sales (FMS) contract has a ceiling value of $81.2 million and the work will be performed at Marietta, Ga. It will likely be completed by Jun 30, 2016.
Budget cut or sequestration is hanging as a Damocles’ sword over major military contractors like Lockheed Martin, Northrop Grumman Corp. (NOC), The Boeing Co. (BA) and Raytheon Co. (RTN). While Lockheed Martin has delivered solid top- and bottom-line growth in recent times, it also has plans to cut jobs and close factories to counter budget austerities. Last year, sales to the U.S. government accounted for as much as 82% of total sales.
Notably, Lockheed Martin guided sales for 2014 to come in lower than the $45 billion forecast for this year. The 2014 forecast takes into account the full impact of sequestration.
Given the difficult times, Lockheed Martin will largely have to depend on the success of its F-35 fighter jet program as well as FMS contracts. Half of the company’s top line is expected to come from foreign governments over the next five years. Previously it had predicted 20% of revenues to come from FMS in the near term. The company seems confident of selling F-35 fighter jets to foreign clients, which would to some extent compensate for lower defense spending at home.
In fact, the company is touted to win a sizeable contract from South Korea for 40 of its F-35 Joint Strike Fighters. Although South Korea's Defense Ministry did not clearly specify Lockheed Martin as the winner, the country’s need of the hour to beef up its stealth capability leaves the company’s F-35A stealth jet as the only viable contender in response to North Korea’s growing nuclear threat.
Other contractors like Raytheon are also focusing on overseas sales to counter domestic budget pressure. Best known for its missile defense systems, such as the Patriot, Raytheon‘s international business is now expected to garner close to 30% of total revenues this year.
Lockheed Martin currently carries a Zacks Rank #3 (Hold). However, defense stocks worth considering include Boeing and Northrop Grumman, both with a Zacks Rank #2 (Buy).
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