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On Feb 21, 2014, we issued an updated research report on Lockheed Martin Corp. (LMT - Analyst Report). Recently, the U.S. Department of Defense’s (DoD) No. 1 contractor posted strong fourth quarter 2013 results with the top and bottom line coming in above the Zacks Consensus Estimate.

Although revenues declined year over year in the final quarter of 2013, earnings per share surged almost 21.4%. Lockheed Martin delivered a positive earnings surprise in each of the last four quarters, with an average beat of 22.6%. These results reflect the company’s strong operational performance.

Despite the uncertainty plaguing the industry, Lockheed Martin ended 2013 with $82.6 billion of backlog. Moreover, with the recent $1.1 trillion Omnibus spending bill, the company is expected to see stability in 2014. The bill backed 68 of F-35 fighter jets over 2015 and 2016. Lockheed Martin’s pricey F-35 program emerged largely unhurt and is expected to gain significant traction in 2014 and 2015.

Lockheed Martin also received $333.5 million from the Omnibus fund for the Air Force’s Combat Rescue Helicopter program. The program calls for Lockheed Martin to build 112 new search and rescue helicopters under a joint venture with Sikorsky. The company forecasts higher earnings for 2014 after registering charges related to U.S. defense budget cuts and workforce reduction in the final quarter of 2013.

On the international front, foreign orders accounted for 23% of the total orders received and 17% of sales in 2013. This year foreign sales are expected to rise to just under 20% of total sales.

Again, Lockheed continues to be a strong cash generator with its operating cash flow reaching approximately $4.5 billion in 2013 (up sharply from $1.6 billion a year ago). Fourth quarter 2013 free cash flow was $593 million despite the $750 million voluntary pension contribution.

The Street reacted favorably to Lockheed’s solid earnings release and the Omnibus bill. Over the past 30 days, 11 of the 15 estimates were revised upwards for 2014. This led to a significant increase of 24 cents in the Zacks Consensus Estimate for 2014, which now stands at $10.57 per share. The company forecasts earnings per share in the range of $10.25 to $10.55 for 2014.

Despite the recent Omnibus bill, which came as a sign of relief for the defense companies like Lockheed Martin, the sector will still continue to face headwinds as Pentagon’s spending moderates from historical levels. Lockheed Martin expects revenue to be in the range of $44.0 billion to $45.0 billion (compared with $45.4 billion in 2013). Hence, the top line forecast is certainly a concern.

Lockheed Martin currently carries a Zacks Rank #2 (Buy). Other defense stocks also worth considering are Northrop Grumman Corp. (NOC - Analyst Report), Embraer SA (ERJ - Analyst Report) and Huntington Ingalls Industries, Inc. (HII - Snapshot Report). While Northrop sports a Zacks Rank #1 (Strong Buy), Embraer and Huntington carry a Zacks Rank #2 (Buy).

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