Pentagon's largest defense contractor, Lockheed Martin Corp.'s (LMT Quick QuoteLMT - Free Report) Rotary and Mission Systems business division has won a modification contact for upgrading its Aegis Combat System. The deal was awarded by the Naval Sea Systems Command, Washington, D.C.

Details of the Deal

Valued at $77.2 million, the contract will utilize research and development funds and other procurement grants in fiscal 2017. Majority of the work related to this deal will be executed in Moorestown, NJ.

Per the terms of the deal, as the Aegis Combat System Engineering Agent, Lockheed Martin will provide design, development, integration, test, and delivery of computer program baselines and associated technology insertion hardware design support for future capability enhancements of the Aegis System. Work is scheduled to be over by Dec 2017.

What’s Aegis Combat System?

Lockheed Martin’s Aegis Ballistic Missile Defense (ABMD) is the naval component of the U.S. Missile Defense Agency's (MDA) Ballistic Missile Defense System (BMDS). It is the world’s only maritime BMDS that can simultaneously attack land targets, submarines and surface ships, while protecting the fleet against aircraft, cruise missiles and ballistic missiles.

Over time, Aegis has evolved with new capabilities to counter emerging threats and leverage new technologies. Its latest configuration, Baseline 9, offers an open architecture framework to allow extreme flexibility. As the Aegis Combat System Engineering Agent, Lockheed Martin has been consistently developing new capabilities and finding innovative ways to deploy them across a fleet of over 100 ships in the U.S. and overseas.

In Aug 2016, this defense major announced plans to expand the global Aegis fleet in the U.S., Japan and the Republic of Korea under a $490 million deal to bring integrated air and missile defense (IAMD) capabilities to new destroyers.These ships will be equipped with Aegis Baseline 9, capable of IAMD.

Our View

Headquartered in Washington, DC, Lockheed Martin’s Rotary and Mission Systems business carries out some of the company’s high-profile programs including the Aegis Combat System, Littoral Combat Ship, MH-60 helicopter avionics along with military and commercial orders. The division’s third-quarter sales of $3.3 billion improved 55% from the prior-year quarter. Operating profit rose 0.8% year over year to $257 million while the operating margin contracted 390 basis points to 7.4%.

Going ahead, the company’s improved cash outlook for 2016 reflects enhanced cash performance at the Rotary and Mission Systems division. That said, the aforementioned contract gain has the potential to boost revenues from at this business division.

Zacks Rank & Other Key Picks

Lockheed Martin currently carries a Zacks Rank #2 (Buy). Other favorably ranked stocks in the aerospace and defense sector include Engility Holdings, Inc. , Northrop Grumman Corporation (NOC Quick QuoteNOC - Free Report) and Wesco Aircraft Holdings, Inc. .

Engility Holdings, sporting a Zacks Rank #1 (Strong Buy), witnessed a 7.8% gain year to date. On an average, the company posted a positive earnings surprise of 23.19% in the trailing four quarters.

Northrop Grumman, also carrying a Zacks Rank #1, witnessed a 30.4% gain year to date. On an average, the company posted a positive earnings surprise of 8.29% in the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Wesco Aircraft, carrying a Zacks Rank #2, has witnessed a 16.5% gain year to date. On an average, the company posted a positive earnings surprise of 2.75% in the trailing four quarters.

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