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Lockheed Clinches $632M FMS Deal for Hellfire II Missile

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Lockheed Martin Corp. (LMT - Free Report) recently secured a $631.8-million deal to deliver a variety of Hellfire II missile variants to Netherlands and Japan, under the Foreign Military Sales program. The contract was awarded by the U.S. Army Contracting Command, Redstone Arsenal, Alabama.

Work related to the deal will be executed in Orlando, FL, with an estimated completion date of Sep 30, 2021. Lockheed Martin will utilize fiscal 2017 and 2018 foreign military sales, and other procurement and Army funds for completing the task.

A Brief Note on Hellfire II Missiles

Hellfire II is an air-to-surface and surface-to-surface missile system, an upgraded version of the Longbow Hellfire missiles. The Hellfire missile can be fired from rotary and fixed-wing aircraft, waterborne vessels, and land- based systems at a variety of targets. It also incorporates a semi-active laser guidance system, which provides it with a precision, man-in-the-loop capability.

Importance of FMS Deals

As more and more developing nations across the world are increasing their defense budget to strengthen their positions in the global defense space, the United States is witnessing more foreign military sales (FMS) contracts, being the world’s largest exporter of arms. In line with this, being Pentagon’s largest defense contractor, Lockheed Martin is seeing increased number of FMS contracts lately.   

Evidently, in the second quarter of 2018, FMS contracts contributed approximately 26% of the company's total revenues. With developing economies like India and Turkey, and recently developed nations like Romania signing more defense deals with the U.S. government, we may expect Lockheed Martin to secure more FMS contracts in coming days.

What Favors Lockheed Martin?

In recent times, increasing geopolitical tensions across the globe has induced nations, both developed and developing, to expand their military arsenal, with missiles constituting a significant part of it. The company, being one of the major missile makers in the United States, stands out among its peers by virtue of its broadly-diversified programs and strong order bookings for its  missile variants. This allows the company’s Missiles and Fire Control unit to deliver positive top-line growth.

Evidently, in second-quarter 2018, revenues at its Missiles and Fire Control unit increased a solid 16.9% year over year, driven by increased volume on air and missile defense programs, thanks to solid contract inflows for these programs. Given the company’s proven expertise in missile programs, we may expect a consistent order flow for Lockheed Martin from Pentagon. This, in turn, will enable the company’s missile business unit to
continue to generate similar top-line growth, in coming days.

Meanwhile, toward the end of June 2018, the U.S. Senate approved the fiscal 2019 defense budget that provisions for major war fighting investments worth $4.6 billion in Preferred Munitions. In particular, the budget includes an investment plan of $600 million for Lockheed Martin’s Hellfire II missiles. Such budgetary developments should have a favorable impact on Lockheed Martin’s financials, in the days ahead.

Looking Ahead

Per the Markets and Markets research firm, the rocket and missile market is projected to see a CAGR of 4.74%, rising from $55.5 billion in 2017 to $70 billion.  Such growth can be attributed to the increasing geopolitical conflicts, war, and terrorism, significantly driving the demand for rockets and missiles on a global scale. Given this huge opportunity for expansion, frequent contract wins from Pentagon for its various missiles, including the
latest one, will allow Lockheed Martin to further enhance its market share in the aerospace and defense industry.

Price Movement

Lockheed Martin’s stock has improved about only 12% in the last year compared with the industry’s growth of 24.5%. The underperformance may have been caused by the intense competition the company faces in the aerospace-defense space for its broad portfolio of products and services, both domestically as well as internationally.



Zacks Rank & Key Picks

Lockheed Martin currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the same sector are Raytheon Company (RTN - Free Report) , Wesco Aircraft Holdings (WAIR - Free Report) and Huntington Ingalls Industries (HII - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Raytheon came up with an average positive earnings surprise of 3.64% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has risen 0.6% to $9.93 in the last 90 days.

Wesco Aircraft delivered an average positive earnings surprise of 1.10% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has moved up 2.6% to 79 cents in the last 90 days.

Huntington Ingalls pulled off an average positive earnings surprise of 9.48% for the trailing four quarters. The Zacks Consensus Estimate for 2018 earnings has moved 6.4% north to $17.24 in the last 90 days.

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