Lockheed Martin Corporation (LMT - Analyst Report) has been awarded three new contracts to support the supply chain needs of the Republic of Korea Air Force and Navy. Under the terms of the basic ordering agreements, Lockheed Martin will provide spare material and repair of military hardware for the Republic of Korea's fleet of F-16s and P-3 military aircrafts. The company has also provided these same services for the C-130 for nearly 13 years. These annual contracts have a $2 million ceiling and are funded incrementally.
Lockheed Martin provides supply chain support for U.S. and international governments as well as commercial customers at operational field sites. The company has the capability to meet rush deliveries through its global network, providing value to customers by reducing emergency maintenance cycles.
Based in Bethesda, Maryland, Lockheed Martin is a global security and aerospace company, engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. Key growth drivers of the company are its focus on debt repayment, its ongoing share repurchase program and the incremental dividend.
A few days back, Lockheed Martin had made an announcement to increase the quarterly dividend rate to $1.15 per share, up approximately by 15 cents from the current payout of approximately $1.00 per share. The proposed hike would bring the annual dividend to $4.60, up 15% from the previous payout. The increased quarterly dividend will be paid on December 28, 2012 to shareholders of record at the close of business on December 3, 2012.
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.
The company is expected to release its third-quarter 2012 results on October 24, 2012. The Zacks Consensus Estimates for third-quarter 2012 and fiscal 2012 are currently pegged at $1.85 per share and $8.10 per share, respectively.
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.
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. In the near term however Lockheed Martin carries a Zacks #3 Rank implying a short-term Hold rating for the next 1-3 months.