Lockheed Martin Corporation (LMT - Analyst Report), the defense industry goliath, exited the second quarter of 2012 on a strong note. Lockheed Martin reported strong top cum bottom line numbers beating past the market apprehension. The company posted second-quarter 2012 operating earnings of $2.38 per share, beating the Zacks Consensus Estimate of $1.92 and the year-ago quarterly earnings of $2.16.
Lockheed Martin also raised its full-year 2012 earnings guidance to a range of $7.90 – $8.10 from its prior range of $7.70 – $7.90, on revenues in the range of $45 billion to $46 billion. The market reaction was however mixed for the ongoing quarter and full-year 2012 as judged from the response of analysts covering Lockheed Martin.
Highlights from the Quarter
Lockheed Martin on the revenue front reported quarterly net sales of $11.9 billion, beating the Zacks Consensus Estimate of $11.3 billion by $616 million. Also, the company superseded the year-ago quarterly revenue of $11.5 billion by $378 million.
The upside in sales came from all the segments barring the Information Systems & Global Solutions segment.
Earnings from continuing operations for the second quarter of 2012 were $781 million versus $748 million a year ago. Overall, Lockheed Martin’s quarterly net earnings rose to $781 million from $742 million in the year-ago period.
Lockheed Martin finished the reported quarter with $75.5 billion of backlog. Of this $26.9 billion belonged to the Aeronautics segment and $24.6 billion to the Electronic Systems segment. The rest is made up of $15.7 billion for the Space Systems segment and $8.3 billion for Information Systems & Global Solutions.
(Read our full coverage on this earnings report: Lockheed Beats, Raises EPS Forecast)
Agreement – Estimate Revisions
Over the past month, estimates for Lockheed Martin for the third quarter of 2012 have witnessed a distinct downward trend with 16 (out of 19 analysts) slashing their estimates with no upward revisions.
On the other hand estimates for full-year 2012 have witnessed a totally different trend where 18 (out of 20 analysts) raised their estimates with no downward revisions. Lockheed Martin’s status as the largest U.S. defense contractor seems to be the driving factor for the positive estimate revisions.
Such a mixed sentiment clearly depicts the analysts’ worry about a shrinking order backlog base. Lockheed’s order backlog fell to $75.5 billion at the end of the first half of 2012 from $80.7 billion at year-end 2011.
Magnitude – Consensus Estimate Trend
Lockheed Martin’s second-quarter beat, however, failed to allay market trepidations about potential cutbacks for its large programs in the face of downward defense budget trends and the incoming effect of sequestration. Any future concerns about the U.S. federal deficit may have an adverse effect on defense spending, especially on Lockheed Martin's high-cost platform programs. Also, Lockheed carries a sizeable pension liability. The company's operating earnings and future cash flows can be affected by higher pension costs in lower interest rate environments. This has influenced estimate revisions for the near term. Looking at estimate revisions for the ongoing quarter, the consensus has fallen by 11 cents over the past month. Currently, the quarterly Zacks Estimate stands at $1.86.
However, Lockheed is the largest U.S. defense contractor with a platform-centric focus that guarantees a steady inflow of follow-on orders from a leveraged presence in the Army, Air Force, Navy and IT programs. This strong position of Lockheed is reflected in the full-year 2012 Zacks Consensus Estimate which climbed from $7.90 to $8.08 over the last 30 days. The long-term bullishness arises from market expectations riding on Lockheed programs like the C-130 Hercules & C-5 Galaxy transport aircrafts, F-16 Fighting Falcon multi-role jet, MH-60 Helicopters, the Advanced Extremely High Frequency (AEHF) & the Global Positioning Satellite III (GPS III) system satellites, the Littoral Combat Ship (LCS), the Aegis Weapons System for mobile and sea-based missile defense and the Terminal High Altitude Area Defense (THAAD) system.
We currently maintain our long-term Outperform recommendation on Lockheed Martin based on revenue growth, improved earnings guidance, incremental dividend payout and stable order backlog. The company’s second quarter adjusted earnings surpassed the Zacks Consensus Estimate and improved year over year, primarily on strong numbers from Aeronautics, Electronic Systems and Space Systems segments. Going forward we believe the current discounted valuation of the defense behemoth versus its peers like The Boeing Company (BA - Analyst Report), Huntington Ingalls Industries, Inc. (HII - Analyst Report) is unwarranted given its leveraged presence in the Army, Air Force, Navy and IT programs. Also, shareholder return will continue to be shored up by the company’s focus on debt repayment, its ongoing share repurchase program and the incremental dividend. Thus, Lockheed Martin carries a Zacks #2 Rank implying a short-term Buy rating for the next 1-3 months.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/.