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On Mar 26, we upgraded aerospace and defense major Lockheed Martin Corporation (LMT - Analyst Report) to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Lockheed reported mixed results in the fourth quarter 2012 with earnings below and revenue above the Zacks Consensus Estimates. But that did not deter us from holding a bullish outlook on the company. Our favorable outlook stems from a solid order backlog, incremental dividend payouts and positive initiatives taken by the company.

Lockheed Martin is a well-managed defense prime. Its working capital improvements continue to impress, as is evident from its inventory turnover of 16.1 times in the trailing twelve months at the end of 2012, compared to only 3.1 times for the Zacks industry average -- a strong sign of operational efficiency.  In addition, Lockheed’s operational effectiveness is evident in its industry-high Return on Investment (ROI) of 34.9% in 2012.

Lockheed Martin has one of the strongest balance sheets among its peers, with a stable long-term debt-to-capitalization of 80.2% at the end of 2012. Lockheed continues to be a strong cash generator with its operating cash flow reaching approximately $1.6 billion during 2012.

Lockheed’s premier position in the defense space is upheld by the company’s solid 2013 guidance. Lockheed Martin forecast full-year 2013 earnings per share in the range of $8.80–$9.10 on net revenues of $44.5–$46.0 billion.

Over the long term, the earnings growth rate is pegged at 6.08% while the top line is expected to rise at a clip of 2.66%. The last 90 days saw the Zacks Consensus Estimates for 2013 and 2014 rise a respective 7.6% and 2.9% to $8.87 and $9.11.

Other Stocks to Consider

Besides Lockheed Martin, other defense stocks that are currently performing well include The Boeing Company (BA - Analyst Report) and Alliant Techsystems Inc. (ATK - Analyst Report). These companies carry a Zacks Rank #2 (Buy). We also have Ducommun Inc. (DCO - Snapshot Report), which currently sports a Zacks Rank #1 (Strong Buy).

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