On Aug 18, 2014, shares of Lockheed Martin Corp. (LMT) soared to a new 52-week high of $172.10. The stock pulled back a bit to end the trading session at $171.52 on that day. This defense prime with a market cap of around $54 billion has seen its shares rise roughly 15.4% so far this year, outperforming the 6.7% gain of the S&P 500 over the same period.
What’s Driving Lockheed Martin Up?
Lockheed has successfully clinched a number of defense contracts in the first half of 2014, thanks to its diversified operations. In June this year, the Pentagon’s No. 1 contractor clinched a $1.9 billion contract from the U.S. Air Force to complete production of the fifth and sixth Geosynchronous Earth Orbit (GEO) satellites. The satellites – GEO-5 and GEO-6 – come under the military’s Space Based Infrared System (SBIRS) program of which Lockheed is the prime contractor. The tasks related to the contract will be carried out in Sunnyvale, CA and will run through Sep 30, 2022. These defense deals are a testimony to the wide range of products at the disposal of Lockheed Martin.
Given the vital role played by satellites in the military space, Lockheed Martin is looking to bolster its satellite product coverage by increasingly investing in R&D and acquisitions. Lockheed recently closed the acquisition deal of Zeta Associates, Inc. Now Zeta Associates is a part of Lockheed Martin’s Space Systems division. In May 2014, Lockheed purchased Astrotech Space Operations, a company specializing in prelaunch processing of satellites.
The company reported a forecast-beating 4.5% rise in second-quarter 2014 earnings per share, backed by strong operational performance. The company raised its 2014 earnings guidance, reflecting lower pension costs and an improved outlook for its space unit. The company recorded positive earnings surprises in the last four quarters, resulting in an average beat of 16.31%.
Although Lockheed has run up against F-35 glitches lately, its F-35 program will definitely trigger significant top-line generation for the company. The Pentagon in its budget for fiscal 2015 (beginning Oct 1) requested $8.3 billion for 34 of the aircraft, including 26 F-35As, 6 F-35Bs, and 2 F-35Cs.
The expected long-term earnings growth rate for the company is set at 8.5% and the Zacks Consensus Estimate for 2014 reflects an estimated 3% jump to $11.21 from $10.89 earned in 2013. For 2015, the bottom line is expected to witness 7.5% year-over-year growth.
The present valuation makes the shares of Lockheed look attractive. The forward price/earnings (P/E) multiple of 15.1 is lower than the peer group average of 16.9, reflecting a discount of 10.7%. In addition, Return on Equity (ROE) of the company is 91.8%, significantly higher than the peer group average of 18.4%.
Lockheed Martin is a Zacks Rank #2 (Buy) stock. Other companies in the defense space worth considering include Northrop Grumman Corp. (NOC), The Boeing Co. (BA) and General Dynamics Corp. (GD), all carrying the same rank as Lockheed Martin.
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