Lockheed Demonstrates Strength

Before markets opened today, the Big Daddy among Defense contractors, Lockheed Martin Corporation (LMT - Analyst Report), reported strong third quarter fiscal 2009 results and raised its fiscal outlook. In the reported quarter with EPS of $2.07, the company beat both the Zacks Consensus Estimate and the year-ago EPS of $1.83 and $1.92, respectively.

Net earnings rose to $797 million in the reported quarter compared to $782 million in the year-ago quarter. In a reversal of fortune, pension accounting adjustment negated $113 million from the quarter while in the year-ago quarter this adjustment had added $32 million to earnings. The spike in pension liability was due to the lower value of the company’s retiree fund.

On the revenue front with $11.1 billion, the company beat the year-ago result of $10.6 billion by 4.5%. The upside in sales, year-over-year came from higher numbers across the board but especially from the Space Systems segment (SS) (8.6%). Of the rest, Aeronautics and Electronics Systems (ES) grew a respectable 5.7% and 4.3%, year-over-year, respectively. However, Information Systems & Global Services segment (IS&GS) grew only marginally -- 0.9% year-over-year.

However, the bottom-line tumbled with operating profit reducing year-over-year by 8.6% and 3.3% in the IS&GS and SS segments respectively. IS&GS was affected by reduction in security solutions activities and global programs. SS’ operating profit decreased primarily due to lower government satellite programs.

This was partially salvaged by higher operating profit in ES and Aeronautics segments which rose 6.9% and 5.6%, year-over-year, respectively. ES was boosted by higher volume on tactical missile, air defense programs and fire control systems. Similarly Aeronautics rose due to increases in Air Mobility and Other Aeronautics Programs.

Lockheed Martin finished the quarter with $76.4 billion of backlog, of which almost $26 billion belongs to the Aeronautics segment. The company reaffirmed its fiscal 2009 revenue outlook and expects revenues in the range of $44.7 – $45.7 billion. However, it raised its outlook for fiscal 2009 EPS and Return on Invested Capital (ROIC).

The company now expects its diluted EPS for fiscal 2009 to be in the range of $7.40 – $7.60 from the earlier guidance range of $7.15 – $7.35. Similarly, ROIC guidance for fiscal 2009 is raised to greater than or equal to 19.5% from the earlier guidance of greater than or equal to 18.5%. However, Lockheed Martin has projected a lower guidance of $7.05 – $7.25 for its fiscal 2010 outlook. We maintain our market Neutral recommendation on the shares of Lockheed Martin.

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