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Lockheed Wins $333M Deal to Boost Trident II Missile Program

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Lockheed Martin Corp.’s (LMT - Free Report) business unit, Space Systems, recently clinched a modification contract to provide associated system support for deployment of Trident II missiles. Work related to the deal is scheduled to be over by Feb 4, 2020.

Valued at $333.3 million, the contract was awarded by the Strategic Systems Programs, Washington, D.C. Majority of the procurement will be executed in Cape Canaveral, FL; Sunnyvale, CA; Kings Bay, GA and Bangor, WA.

Trident II Specifics

Trident II (D5) is the latest generation of submarine-launched fleet ballistic missiles (SLBMs), equipped with multiple independently targetable re-entry vehicles (MIRV) and thermonuclear warheads. Since its design completion in 1989, Trident II has made 167 successful test launches — a record unmatched by any other large ballistic missile or space launch vehicle.

Rationale Behind the Deal

Of late, increasing geopolitical conflicts, war, and terrorism across the globe have forced developing nations, the United States and other developed countries to significantly boost their missile strength.

As a result, the United States — the largest provider of missile defense systems — is witnessing increased number of contracts from its government as well as allies for supplying combat proven missiles.

SLBM is an integral part of the United States’ strategic nuclear deterrent Triad and the Trident II D5 is one of the major SLBM programs in the nation. This surely positions Lockheed Martin, which is Trident’s primary contractor, in a comparatively advantageous spot when it comes to the U.S. Navy’s preferred missile programs. These factors may have helped Lockheed Martin to win the latest contract.

Further, this latest deal bears testament to the fact that Trump administration is leaving no stone unturned in strengthening the nation’s arsenal as promised in fiscal 2019 defense budget. Notably, the United States adopted such a solid stance following missile threats from North Korea and Russia.

What Will Lockheed Martin Gain?

Since the beginning of 2018, Lockheed Martin’s Space Systems business segment, which is engaged in the research and development of strategic and defensive missile systems including Trident, has been suffering sales decline. Lower volumes for government satellite programs and commercial satellite programs can be primarily attributed to for this unit’s weak top-line results.

Now, the latest contract win may allow the Space Systems unit to make a rebound in its revenues and result in top line growth in the second half of 2018. Moreover, during second quarter earnings call, the company raised its 2018 sales outlook for this segment by $350 million even after witnessing declining sales in consecutive two quarters of 2018. To this end, we may expect the latest contract win to play a crucial role in the company achieving its increased sales target for Space Systems.

Looking Ahead

The global rocket and missile market, which also includes fleet ballistic missiles, is projected to witness a CAGR of 4.74% during 2017-2022 to reach a value of $70 billion by 2022 (as per Markets and Markets research firm). Such projects reflect improved growth opportunities for missile-makers like Lockheed Martin in the aforementioned market in the years to come.

Moreover, in June 2018, the U.S. Senate gave the final nod for the fiscal 2019 defense budget worth $717 billion. Notably, this budget provisions for an investment of approximately $6 billion in the United States’ missile defense program. Such budgetary developments should have a favorable impact on Lockheed Martin’s financials, with the company being the Pentagon’s largest defense contractor, in the days ahead.

Price Movement

In a year’s time, Lockheed Martin’s stock has improved about only 11% compared with the industry’s 25.1% growth. The underperformance may have been caused by the intense competition that 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 #2 (Buy). A few better or similar-ranked stocks in the sector are Huntington Ingalls Industries (HII - Free Report) , AeroVironment (AVAV - Free Report) and Wesco Aircraft Holdings (WAIR - Free Report) . While Huntington Ingalls and AeroVironment sport a Zacks Rank #1 (Strong Buy), Wesco Aircraft carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

AeroVironment came up with an average positive earnings surprise of 365.27% in the preceding four quarters. The Zacks Consensus Estimate for 2018 earnings moved up 22.5% to $1.36 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 moved 6.4% north to $17.24 in the last 90 days.

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

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