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Lockheed Gets $4.8B F-35 Contracts

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Lockheed Martin Corporation (LMT - Analyst Report) was allotted three contracts worth $4.8 billion by the Naval Air Systems Command related to the F-35 Lightning II Joint Strike Fighter (“JSF”) program.

The F-35 Lightning II is a family of single-seat, single-engine, fifth generation multi-role fighters that are designed for ground attack, reconnaissance, and air defense missions with stealth capability. It is the next-generation strike aircraft for the Navy, Air Force, Marines and U.S. allies.

Of the three, the largest contract is a $3.7 billion award for the procurement of 31 fighters. Among the fighters, 18 would be conventional take-off and landing aircrafts for the Air Force; 6 short take-off vertical landing aircrafts for the Marine Corps; and 7 Carrier Variant aircrafts for the Navy. Work on the contract will be performed in Fort Worth, Texas (35%); El Segundo, California (25%); Warton, United Kingdom (20%); Orlando, Florida (10%); Nashua, New Hampshire (5%); and Baltimore, Maryland (5%). Lockheed expects to deliver by February 2015.  

Apart from this, Lockheed also received two contracts worth approximately $1.1 billion for spares and sustainment of the F-35 Joint Strike Fighter program. Of the two, the bigger one worth $753.4 million is to provide non-recurring sustainment and logistics support for delivered and projected air systems. Work will be performed in Fort Worth, Texas (35%); El Segundo, California (25%); Warton, United Kingdom (20%); Orlando, Florida (10%); Nashua, New Hampshire (5%); and Baltimore, Maryland (5%). Lockheed expects to finish work on this contract by December 2015.  

The other contract worth $374.5 million is for the manufacture and delivery of initial air vehicle spares.  Work for this contract will be performed in Fort Worth, Texas (35%); El Segundo, California (25%); Warton, United Kingdom (20%); Orlando, Florida (10%); Nashua, New Hampshire (5%); and Baltimore, Maryland (5%). The company expects to finish work on this contract by November 2015.  

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, an 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 - Analyst Report).
    
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 possesses 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 enhanced owing to 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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