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Can Lockheed Martin (LMT) Pull a Surprise in Q4 Earnings?

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Pentagon’s largest defense contractor, Lockheed Martin Corporation (LMT - Free Report) is set to release fourth-quarter 2016 results on Jan 24, before the opening bell.

In the prior quarter, the company reported a positive earnings surprise of 26.22%. It is worth noting that Lockheed Martin has outperformed the Zacks Consensus Estimate in the trailing four quarters, the average positive surprise being 11.36%.

Let’s see how things are shaping up at the company prior to this announcement.

Factors at Play

The fourth quarter has been quite overwhelming for Lockheed Martin, primarily after being slammed by Trump for its ‘overtly’ expensive F-35 program. Yet, the company managed to secure multiple contracts, both from the Pentagon as well as foreign allies. Further, the company continues to enjoy a leading position in the U.S. aerospace and defense sector, thanks to its varied product offerings.

The important contracts received during the fourth quarter include the $7.19 billion modification contract for the F-35 Lightening II Joint Strike Fighter aircraft as well as the $1.2 billion foreign military sales (FMS) deal won for upgrading Korean F-16 fighter jets.

The company nabbed another big budget contract worth $1.5 billion from the U.S. Army for fiscal 2017 Patriot Advanced Capability-3 (PAC-3) and PAC-3 Missile Segment Enhancement (PAC-3 MSE) interceptors production and delivery.

Other notable deals during the fourth quarter include a $138 million modification contract to provide support services for VH-3D/VH-60 Executive Helicopter Special Progressive Aircraft Rework sustainment, $133.4 million modification deal from the U.S. Air Force to provide two U.S. government-configured C-130J-30 aircraft and another modification contract worth $125 million for providing engineering and technical support for Acoustic - Rapid Commercial-Off-The-Shelf (COTS) Insertion (A-RCI) systems.

As far as Lockheed Martin’s expectations regarding fourth-quarter results are concerned, management anticipates realizing more than $5 billion of revenues at the company’s Aeronautics division.

However, Lockheed Martin’s F-35 program has been in the headlines for quite some time, on account of persistent underperformance in key tests. Michael Gilmore, director of operational test and evaluation of the Department of Defense (“DoD”), who had earlier raised doubts regarding this program, accused Pentagon officials of preparing a deceptive review of its progress last month.

Moreover, Trump stuck to his views about the program being exorbitantly expensive, even after the company’s CEO briefed him about how the company has been working on bringing down the cost of the F-35 fighter jet and “delivering an affordable aircraft”. This might hurt the company’s profits from the F-35 program in the fourth quarter.

For the fourth quarter, the Zacks Consensus Estimate for earnings stands at $3.04 a share, up 1% year over year, while the consensus for revenues is pegged at $13.09 billion, implying a 1.33% year-over-year improvement.

Earnings Whispers

Our proven model does not conclusively show that Lockheed Martin is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.

Zacks ESP: Lockheed Martin has an Earnings ESP 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at $3.04. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Lockheed Martin carries a Zacks Rank #1 which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Price Movement

Lockheed Martin lost about 1.9% in the last six months, underperforming the Zacks categorized Aerospace-Defense Equipment industry’s gain of 7.1%. This is probably due to the company’s declining backlog, overdependence on the F-35 program as well as intensifying competition.

Stocks that Warrant a Look

Unlike Lockheed Martin, we see likely earnings beats coming from these industry peers in the to-be-reported quarter:

Huntington Ingalls Industries, Inc. (HII - Free Report) is expected to report fourth-quarter 2016 results on Feb 16. The company has an Earnings ESP of +2.82% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

L3 Technologies, Inc. is scheduled to report fourth-quarter 2016 results on Jan 26. The company has an Earnings ESP of +2.36% and a Zacks Rank #3.

Raytheon Company is expected to report fourth-quarter 2016 results on Jan 26. The company has an Earnings ESP of +2.15% and a Zacks Rank #2.

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