Defense contractor Lockheed Martin Corporation (LMT) has entered into a definitive agreement to acquire QTC Holdings Inc. The transaction is expected to close before the end of fiscal 2011 and is subject to government approvals, including a review under the Hart-Scott-Rodino Antitrust Improvements Act.
QTC Holdings headquartered in Diamond Bar, California, is the largest provider of outsourced medical evaluation services to the U.S. government and the U.S. Department of Veterans Affairs, processing more than 450,000 evaluations in fiscal 2010.
Lockheed Martin’s acquisition of QTC Holdings will increase the company’s IT expertise, which will be a natural fit within its Information Systems & Global Solutions segment. The acquisition would help the beleaguered segment, which in the recently reported second quarter of 2011 witnessed 6% lower quarterly sales year over year. The decline in quarterly sales was due to the absence of the Decennial Response Integration System (DRIS 2010) program that supported the U.S. census in 2010.
Overall, Lockheed, however, reported earnings per share of $2.14 in the second quarter of 2011, comfortably surpassing the year-ago results and the Zacks Consensus. Emboldened by the strong performance, the company raised the 2011 earnings expectation to a range of $7.35 to $7.55 per share from the previous band of $6.95 to $7.25.
The Zacks Consensus Estimates for third quarter 2011, fiscal year 2011 and fiscal year 2012 are currently pegged at $1.81, $7.54 and $8.80 per share, respectively.
Lockheed Martin is the largest U.S. defense contractor with a platform-centric focus, steady inflow of follow-on orders and leveraged presence in the defense services and IT programs. However, the ongoing trend of governmental delays in program decisions coupled with program cancellations has affected the fortunes of the defense industry in general and Lockheed Martin in particular.
Lockheed Martin currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock. Reductions in defense budgets, which will likely hurt the company’s profitability, induce us to remain on the sidelines.
The cautious outlook is reflected across the board in the defense and aerospace industry. Lockheed Martin’s major peers, General Dynamics Corporation (GD) and The Boeing Company (BA) also retain a short-term Zacks #3 Rank.
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