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John Engle
John Engle
Articles (613) 

Lockheed Martin: Big Military Contracts Keep Rolling In

The aerospace and defense stalwart raked in procurement contracts to the tune of $123 billion last year

January 15, 2021 | About:

December was a big month for Lockheed Martin Corp. (LMT). As I discussed in a previous article, Lockheed announced plans to acquire Aerojet Rocketdyne Holdings Inc. (AJRD), a solid rocket motor maker, for $4.4 billion, but that was just the tip of the iceberg for the aerospace and defense giant. A raft of major procurement contract awards were also announced last month, adding to an already impressive year for Lockheed. It has really set the stage for an exciting 2021.

Rolling in the contracts

Lockheed won 32 procurement contracts in December, carrying a combined value of $4.8 billion, including $2.4 billion in upfront cash. A solid haul by any measure, 90% of the awards came from various branches of the U.S. military.

The lion's share of Lockheed's December contracts relate to the F-35 Lightning II next-generation fighter jet, including a massive $1.28 billion to support international logistics and training and a further $900 million to fund procurement of long-lead materials necessary to produce 133 aircraft. Smaller awards related to the F-35 included $102 million to support flight services in the United Kingdom and $97 million to support aircraft modification efforts.

Lockheed's jets were not the only winners in December. The company also won a number of lucrative military helicopter contacts. The largest of these, with a price tag of $507 million, consists of a modification of a prior deal inked in 2017 with the U.S. Army to produce 257 Black Hawk medium-lift helicopters.

Lockheed's December was actually modest by comparison to the rest of 2020. Indeed, Lockheed won contracts worth an eye-popping $123.4 billion last year, a 122% increase from the year prior.

A new year beckons

So far, 2021 has started off quite well for Lockheed contracts-wise. On Jan. 4, the Pentagon announced plans to pay Lockheed $4.9 billion to build three geosynchronous Next-Generation Overhead Persistent Infrared satellites. The satellite program, which Lockheed developed under a prior $2.9 billion contract, represents one of the first tangible investments in the U.S. Space Force.

Lockheed followed up its Space Force win the very next day with the announcement of a $731.1 million contract to provide "in-service lifetime support efforts, including engineering, technical and logistical support related to the maintenance and modernization" for the U.S. Navy's Aegis Combat System. On Jan. 11, Lockheed secured an additional $59 million from the Defense Advanced Research Projects Agency for its ongoing hypersonic booster development program.

The depth of Lockheed's procurement contract pipeline may hearten investors who feared that delays to award announcements, a response to the political and budget turmoil that has roiled the nation's capital in recent months, would hamper its growth. Lockheed's strong ties with the Pentagon have evidently paid off, as Goldman Sachs (GS) predicted they would in its December update on the name:

"Over the last several years, Lockheed Martin's backlog has substantially outgrown the rest of the industry, supporting the growth outlook for the foreseeable future. The company has exposure to Department of Defense priority buckets, and consistently executes well. Even if the end market growth rate slows, we expect continued strong fundamentals, with compounding earnings and cash flows."

My verdict

With the geopolitical climate increasingly tumultuous, there is likely to be no shortage of demand for Lockheed's wares anytime soon. Many aerospace and defense stocks are likely to enjoy tailwinds in 2021 as investors bet on a booming weapon systems market.

The fact that Lockheed has managed to maintain a strong procurement pipeline despite recent domestic political turmoil speaks to its ability to navigate uncertain market conditions successfully, and may help to set it apart from the rest of the pack in the eyes of investors.

I would not be surprised to see Lockheed's stock climb as investors increase their exposure to the defense sector. From what I can surmise, there are few better options in the space.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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