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Lockheed Wins $72M Deal for Installing Warfare in Submarines

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Defense bellwether Lockheed Martin Corp.’s (LMT - Free Report) business segment, Rotary and Mission Systems, clinched a modification contract for providing electronic warfare equipment to support Virginia-class submarines. Work related to the deal is scheduled to be over by April 2020.

Details of the Deal

Valued at $71.5 million, the contract was awarded by the Naval Sea Systems Command, Washington Navy Yard, D.C. Majority of the work will be executed in Syracuse, NY and Fairfax, VA; while the rest will be performed in Germantown, MD; Van Nuys, CA and Buffalo, NY.

The contract will utilize fiscal 2017 shipbuilding and conversion, fiscal 2016 shipbuilding and conversion, fiscal 2017 other procurement and fiscal 2016 other procurement funds to complete the task.

A Brief Note on Virginia-Class Submarines

The Virginia-class submarine program is a class of nuclear-powered fast-attack submarines (SSNs), designed for a broad spectrum of open-ocean and littoral missions. These are being jointly constructed by military shipbuilders General Dynamics Corp. (GD - Free Report) and Huntington Ingalls Industries Inc. (HII - Free Report) .

The submarines are also designed for intelligence, surveillance and reconnaissance operations as well as mine warfare. Valued around $2.7 billion each, these ships will be operational until 2070.

What’s Electronic Warfare?

Electronic Warfare (EW) represents the ability to use the electromagnetic spectrum-signals such as radio, infrared or radar — to sense, protect, and communicate. Being one of the top-graded defense contractors in the world, Lockheed Martin manufacturers advanced EW technologies that have the ability to control the electromagnetic spectrum.  The company also develops disruptive technologies to combat adversary threats.

For the U.S. Navy, Lockheed Martin offers a handful of next-generation EW systems like the Advanced Off-Board Electronic Warfare (AOEW), Surface Electronic Warfare Improvement Program (SEWIP) and MK234 Nulka Off board Countermeasure System. By incorporating these new age warfare systems, the Navy fleets can detect incoming threats and effectively respond to them.

Our View

The U.S. Navy has acknowledged the Virginia-class program as one of its top priority, and a sumptuous budget has been allotted to the same. Currently, the Navy plans to procure two Virginia-class submarines in fiscal 2018, for a total investment worth $5.5 billion. The move will boost the ship’s manufacturers — General Dynamics and Huntington Ingalls — along with Lockheed Martin, the EW of which will be installed in these ships. We believe the recent modification contract is a notable step toward the fulfillment of the plan.

Moreover, the fiscal 2017 defense budget strongly emphasized on enhancing the nation’s EW capabilities along with other defensive abilities. In particular, the budget included an investment of $1.2 billion for upgrading the U.S. fleets by spending more on development including for that of EW.  This raises hope for increased demand for Lockheed Martin’s combat-proven EW systems, which in turn will boost its revenues.

Lockheed Martin’s EW serves the U.S., Australian and Canadian Navy. Going ahead, the global EW market is expected to reach a value worth $25.36 billion by 2021 and with Lockheed Martin being a dominating player in the space, the stock is poised to grow.

Price Performance

Lockheed Martin’s stock has moved up 26.5% in the last one year, underperforming the broader industry’s gain of 39.5%.This could be of the present defense budget which is in favor of the sector. Furthermore, we believe that budget deficits and political uncertainty might make future defense budgets vulnerable to cutbacks.

Zacks Rank & Key Pick

Lockheed Martin currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the same space is Leidos Holdings, Inc. (LDOS - Free Report) , which currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Leidos Holdings surpassed Zacks Consensus Estimate in three out of past four quarters with an average earnings surprise of 18.01%. The company’s long-term earnings growth rate is 10%.

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