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Lockheed F-35 to Arrive in Canada

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Lockheed Martin Corp. (LMT - Free Report) announced that the Government of Canada will acquire 65 F-35 Lightning II Joint Strike Fighter jets for $8.5 billion. Canada plans to acquire 65 F-35s to replace its existing fleet of CF-18 Hornets. Lockheed Martin will begin delivering F-35s to Canada in 2016.
 
Lockheed Martin’s F-35 is a supersonic, multi-role, stealth fighter developed and funded by a consortium of nine countries, including Canada. It is designed to excel in both air-to-air and air-to-ground operations and features the most comprehensive and powerful avionics of any fighter ever produced.
 
The company is developing the F-35 together with its principal industrial partners, Northrop Grumman Corp. (NOC - Free Report) and BAE Systems Plc. (BAESY - Free Report) . The focus of the Pentagon on the F-35 program is evident as till date two separate, interchangeable F-35 engines are under development.  The two engines under development are Pratt & Whitney F135 and GE Rolls-Royce Fighter Engine Team F136.
 
Lockheed Martin remains a key player within the military space and continues to benefit from strong defense spending. The company’s customer base includes the U.S. Government, foreign governments and other commercial buyers. Lockheed’s traditional defense focus appears strong, with increasing interest from domestic and international customers.
 
We believe Lockheed Martin has a promising future based on Obama Administration’s focus on Smart Power application and cyber security. The company finished the first quarter of fiscal 2010 with a backlog of $75 billion.
 
Lockheed Martin is slated to release its second quarter results of fiscal 2010 on July 27, 2010. The Zacks Consensus Estimate for the quarter currently stood at $1.78, lower than the year-ago quarterly earnings of $1.88.
 
Lockheed Martin has one of the strongest balance sheets among its peers with a low long-term debt-to-capitalization of 55.6% after first quarter-end 2010 (Zacks industry average was 93.2%). Lockheed continues to be a strong cash generator with its annual operating cash flow touching approximately $3.2 billion during fiscal 2009. Management is also prudent in returning a substantial portion of its free cash flow to shareholders through share repurchases and incremental dividends.
 
However, we believe all the above-mentioned positives have already been taken into account in the current share price of Lockheed Martin. This justifies the Zacks #3 Rank, which translates into a short-term “Hold” recommendation. Considering the company’s business model and fundamentals, we retain a long-term “Neutral” recommendation on the stock.

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