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Saudi Arabia, U.S. Ink $15B LOA for Lockheed's THAAD Missile

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Per CNBC, the Kingdom of Saudi Arabia has signed a letter of offer and acceptance (LOA) with the United States for procuring Lockheed Martin's (LMT - Free Report) THAAD missile system. The deal was triggered after the U.S. State Department approved the sale of a THAAD anti-missile defense system to the Arab nation.

The development on the deal is expected to have taken place as Saudi Arabia is under fire over the slaying of journalist Jamal Khashoggi. The deal value is estimated to be around $15 billion and would entail Lockheed Martin to provide 44 THAAD launchers, missiles and related equipment to the Kingdom of Saudi Arabia.

How Can the Deal Benefit Saudi Arabia?

Since 2015, Saudi Arabia along with its allies has been bombing the Iran-aligned Houthis in Yemen. Ever since, the country has been fighting terrorism in that region and has supported Yemen’s legitimate government. Evidently, Saudi Arabia has strongly emphasized on strengthening its missile arsenal due to rising tensions looming over this region along with a possible Iranian armed group expansionism. We anticipate the $15 billion THAAD Missile deal to significantly benefit the country in controlling situations in the Yemen region.

What Favors Lockheed Martin?

In context of the company’s relationship with Saudi Arabia, Lockheed Martin provides a number of major programs and capabilities to the nations. This has immensely helped the business to thrive in the Middle East region over the years.

Interestingly, Lockheed Martin’s Missiles and Fire Control (MFC) business unit derives a major portion of its revenues from its air and missile-defense product line, with THAAD being a notable contributor. In the third quarter, the MFC business segment generated sales of $2.27 billion, which represented 16.1% year-over-year growth. This unit has been witnessing strong demand growth in the overseas, specifically from the Middle East. To this end, we may expect this unit to witness notable revenue growth in the near-term as well, courtesy of the latest contract win.

Further, the fiscal 2019 U.S. defense budget provisioned for a spending plan of $6 billion for varied missile programs. Lockheed Martin is expected to gain significantly from this budget, which includes an investment plan of $1.1 billion for its THAAD missiles.

Price Movement

Lockheed Martin’s stock has declined 6% in the past year against the industry’s gain 2.9%. 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 and internationally.

Zacks Rank & Other Key Picks

Lockheed Martin currently carries a Zacks Rank #2 (Buy).

A few other top-ranked companies in the same sector are Aerojet Rocketdyne Holdings (AJRD - Free Report) . Raytheon Company (RTN - Free Report) and The Boeing Company (BA - Free Report) .

While Aerojet Rocketdyne sports a Zacks Rank #1 (Strong Buy), Raytheon and Boeing carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Aerojet Rocketdyne came up with average positive earnings surprise of 19.27% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has increased 43.3% to $1.82 in the past 90 days.

Raytheon delivered average positive earnings surprise of 6.71% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has moved up 1.7% to $10.10 cents in the past 90 days.

Boeing delivered average positive earnings surprise of 28.01% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has moved up 3% to $15.05 in the past 90 days.

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