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Lockheed Martin Corporation (LMT - Analyst Report) has received a $111 million Modernized Target Acquisition Designation Sight/Pilot Night Vision Sensor (M-TADS/PNVS) Performance Based Logistics (“PBL”) contract from the U.S. Army.

The PBL contract is a firm-fixed price, comprehensive sustainment solution that enables mission readiness, reduces Operations and Support (O&S) costs and drives reliability and maintainability improvements. The contract consists of a one-year base and three one-year options extending through December 2015. The total four-year contract value is $375 million.

M-TADS/PNVS modernizes the U.S. Army’s TADS/PNVS by upgrading the infrared sensors and associated electronics. M-TADS/PNVS provides Apache pilots with the most advanced long-range, electro-optical precision engagement and pilotage capabilities to ensure mission success and flight safety in day, night and adverse-weather missions.

The U.S. defense budget for 2012 was $645.7 billion, with the base budget at $530.6 billion and $115.1 billion approved for Overseas Contingency Operations (“OCO”) as supplementary defense spending, mainly to fund ongoing wars. In February this year, the Department of Defense (“DoD”) requested a Pentagon base budget of $525.4 billion for 2013, which is approximately $5.1 billion or 1% less than what is approved for fiscal 2012, with $88.5 billion earmarked for OCO spending.

In early August 2012, the subcommittee recommended $511 billion for DoD’s base budget and $93 billion for OCO spending, for a total of $604.5 billion for fiscal 2013.

Going forward, we believe Lockheed Martin has significant upside potential based on the Obama administration’s focus on Intelligence Surveillance Reconnaissance (ISR), unmanned systems, force protection, cybersecurity, and missile defense. It already sits on an order backlog of approximately $75.5 billion at the end of the first half of 2012.

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.

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) and Huntington Ingalls Industries Inc. (HII - Snapshot 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.

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