“We the People of the United States” – arguably the most powerful and recognized words in the English language. This preamble to the Constitution sets forth several mandates, and one of the top five is to "provide for the common defense." It is well known that defense spending has been increasing for the last several decades and shows no sign of slowing. Even with the pull of troops from several overseas theatres, the U.S. will continue to uphold this directive through continuing contracts with several defense and aerospace companies such as Lockheed Martin (NYSE:LMT) and Raytheon (NYSE:RTN). I propose that recent slips in stock performance is based solely on consumer response and that those companies who continue to focus on government and private contracts will continue to perform successfully.
What Has Happened
Lockheed Martin is a global presence, specializing in aerospace, defense, security, and advanced technology. As one of the world's largest defense contractors, the company has capitalized on its partnership with the Pentagon, from whence came almost 10% of its last year’s revenue. In total, the company headquartered in Bethesda, Maryland, takes about 74% of its revenues from military sales.
In 2009 alone, U.S. government contracts accounted for just under $40 billion, and foreign government contracts just under $6 billion. This accounts for almost 98%, with the remaining 2% coming from commercial and other contracts.
This focused strategy of topping the list of U.S. federal contracts has allowed it to stay competitive, while rivals are seeing decline. One of these competitors, Boeing (NYSE:BA), closed at a loss of $.58 or .8%, to $72.92.
Last month, Lockheed was upgraded from "underperform" to "outperform" by RBC Capital Corp. This rating, in combination with its dividend payment of almost 25% above its nearest competitor, is not the only reason investors are looking into this stock regardless of the gloom-and-doom prophecies concerning defense spending cuts. Looking back, the company has a reputation from growing too big and needing outside sources to put a cap on its growth and influence.
Case and point: in 1998, Lockheed Martin was forced to abandon plans for a merger with Northrop Grumman. The $8.3 billion merger would result in the new company having control of 25% of the Department of Defense's procurement budget.
In 2001, The company partitioned off Lockheed Martin Control Systems and sold to BAE Systems. This allowed for a focus on its newly won contract to build the F-35 Lightning II, the largest fighter aircraft procurement project since the F-16. The initial order was for 3,000 aircraft at a hefty $200 billion price tag.
What Is Happening
Lockheed Martin, while continuing to perform, still faces its share of potential pitfalls. In 2004, Robert Stevens took the position of chief executive officer. His initial problem was that the company was about to lose almost three-quarters of its 130,000 employees over his first few years due to retirement.
With steady focus and strategic implementation, Stevens led his company in what should be taken as an example of prioritization in motion.
In two years, he had not only fulfilled order obligations, but had won an additional $3.9 billion contract from NASA to design and build the Orion capsule. With profits from this contract, he was able to absorb the talent he needed from partnerships and acquisitions of other companies – a strategic and cost effective way to alleviate personnel problems than simply sinking money into hiring, training, etc.
In 2008, Lockheed Martin acquired the government business unit of Nantero Inc., a company that had developed methods and processes for incorporating carbon nanotubes in next-generation electronic devices. The following year, it bought Unitech.
Most recently, it completed a huge milestone with rival/partner Raytheon with its first successful integration of Raytheon's Global Positioning System Lockheed Martin's GPS satellite system. The collaboration of the two sites has extended future impact such as replace the current aging GPS satellites with improved capabilities for both military and commercial use.
Raytheon is the world’s largest producer of guided missile systems. Having been around long before Lockheed Martin – stretching back to 1925 and playing roles in all major campaigns from World War II and beyond – it shows that successful business operations are based on more than a good product. The clear leader in the Aerospace/Defense Industry in contracts as well having a dividend yield of 4.50% is LMT. Raytheon shows a distant 3.30%.
What Will Happen
Lockheed Martin has produced most of the big name fighter planes of our time, including the F-16 Falcon and F-22 Raptor. Last week along with its partner Northrop Grumman (NYSE:NOC), it showcased its F-35 Lightning II mobile cockpit demonstrator to state and other elected officials. This technology is by far the worlds' most advanced multirole fighter aircraft.
This company’s continued production of stellar technology ensures its growth and performance. In contrast, Boeing is currently celebrating with China Southern Airlines the 4,000th Next-Generation 737. This model seats 126 passengers in a two-class configuration with the new Boeing Sky Interior. Truly, this is a step forward in comfort flying, however, with commercial airlines and manufacturers on a steady decline over the past few years, I don’t see this as a competitive move.
Boeing currently sits around $73 with a downward trend. Lockheed Martin shares are trading close to the $90 mark, and as a large cap approaching $29 billion with a trailing 12-month price to earnings ratio of 11.39, I see this stock as a definite bargain. I also see that, while budget cuts might possibly be in the future, the company has set itself up for stable growth through this year because of its partnership with Raytheon. GPS devices will only continue to grow in the commercial sector as technology develops for phones and other mobile devices.
About the author:
I fundamentally analyze every business from the top down.
In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.