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Lockheed Gets Army Contract

LMT BA

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Lockheed Martin Corporation (LMT - Analyst Report) was competitively awarded by the U.S. Army a $114 million, five-year contract to upgrade combat vehicle simulators for soldier training, and also to expand the training capability for the Marine Corps.

Per the contract, Lockheed Martin will develop and install 13 upgrades for close combat tactical training systems at 19 Army installations. The new technologies will add integrated displays and replicate tactical vehicle capabilities identical to those now entering the field. The enhancements will be fielded from February 2013.

In addition to the upgrades for the Army, the company will also deliver new training systems to the Marine Corps at Camp Lejeune, North Carolina, providing commonality across services. Engineering work for this training system will be performed in Orlando, Florida.

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. Some of Lockheed Martin’s main competitors are The Boeing Company (BA - Analyst Report) and General Dynamics Corporation (GD).

Lockheed Martin recently reported strong third quarterly numbers of $2.26 per share, beating the Zacks Consensus Estimate of $1.85. This was also higher than the year-ago quarterly earnings of $2.06.

On the revenue front, Lockheed Martin reported quarterly revenue of $11.9 billion, beating the Zacks Consensus Estimate of $11.1 billion. However, the figure fell below the year-ago quarterly revenue of $12.1 billion.

During the third quarter, the company repurchased 3.3 million shares at a cost of $294 million. In September this year, the company increased its 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 $75.6 billion at the end of the first nine months of 2012.

Further, we expect shareholder return to continue to be shored up by the company’s focus on debt repayment, its ongoing share repurchase program and the incremental dividend.

However, we are concerned about the budget deficits and political uncertainty that make future defense budgets vulnerable to cutbacks. Lockheed Martin presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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