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On Jan 10, 2014, Zacks Investment Research upgraded the largest U.S. defense operator Lockheed Martin Corp. (LMT - Analyst Report) to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Lockheed Martin has been witnessing rising earnings estimates for 2014 on the back of continuous order flows from the Pentagon’s funding list. In the recent past, the company has received a series of contracts from the U.S. Department of Defense (DoD), ranging from big to small tickets. These defense deals are a testimony to the wide range of products at the disposal of Lockheed Martin.

Recently, Lockheed Martin received two production contracts from the U.S. Air Force, valued at $449 million in total. The contracts call for the company to continue production of its Joint Air-to-Surface Standoff Missile, and the extended range variant. The two contracts include production of 340 baseline missiles and 100 ER missiles.

Apart from the big wins, the company received small contracts, which kept the order book ticking amidst harsh budget austerities. Again, 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. Most of the company’s top line is expected to come from foreign governments over the next five years.

This well-known defense behemoth delivered positive earnings surprises in 3 of the last 4 quarters with an average beat of 14.00%. Along with earnings growth, Lockheed Martin has boosted its dividend rate. From a quarterly payout of 11 cents a share in 2002, it has increased to $1.33. Its annual dividend is now $5.32, which has a 3.6% yield.

The solid performance of the company in 2013 is also reflected in its traded price. Lockheed’s share price closed at $148.66 on Dec 31, 2013, reflecting a gain of 64.8% over the last twelve-month period.

We believe these strong fundamentals have led to the rank upgrade.

Other Stocks to Consider

Besides Lockheed Martin, other companies in the in the aerospace/defense sector that are worth considering include General Dynamics Corp. (GD - Analyst Report), Northrop Grumman Corporation (NOC - Analyst Report) and The Boeing Company (BA - Analyst Report). These stocks carry a Zacks Rank #2 (Buy).

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