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John Engle
John Engle
Articles (604) 

Lockheed Martin's Space Division Reaches for the Stars

The defense industry titan is expanding its foothold in the space economy

March 03, 2021 | About:

Lockheed Martin Corp. (NYSE:LMT) has been a fixture of the aerospace and defense sector for decades. Its deep ties to the Defense Department have earned the company the enviable status of go-to contractor for countless sensitive Pentagon programs. As I have detailed previously, Lockheed had a strong 2020, bringing in an impressive haul of contracts.

2020 was a big year for Lockheed in more ways than one. It also marked the next phase of expansion by the defense giant's space division. Of particular note was its announcement that it would acquire Aerojet Rocketdyne Holdings (NYSE:AJRD), an important manufacturer of solid rocket motors.

Lockheed appears set to consolidate its foothold in outer space this year, as well as lay the groundwork for future expansion in the lucrative and growing sector. Based on its progress thus far, its efforts should not go unrewarded.

Slipping the surly bonds

On Jan. 21, Lockheed reported earnings for the fourth quarter of 2020. The company's Space segment made a good showing overall, bringing in $3.24 billion in net sales, up 14% from the same period in 2019. Bottom-line improvement was even more impressive, with operating profit surging 43% year over year to $368 million.

The segment's full-year performance was more of a mixed bag, however. While net sales grew 9% in 2020 to $11.88 billion, operating profit actually fell 4% to $1.15 billion. This appears to be only a temporary headwind, however, as the profit hit was in large part the result of a number of federal government satellites being retired, as Lockheed discussed in its earnings press release:

"Operating profit decreased approximately $90 million for government satellite programs due to lower risk retirements on the various programs...This decrease was partially offset by increases of $40 million for commercial satellite programs due to charges recorded for performance matters in 2019 not repeated in 2020."

Overall, Lockheed's space business was looking strong in 2020 and poised for further growth in 2021.

Space, the final frontier

Lockheed's management team was eager to highlight the Space segment in their January earnings presentation. During the subsequent earnings call with Wall Street analysts, CEO James Taiclet highlighted Lockheed's comprehensive space strategy:

"We have a strong position in the classic large bus military defense satellites and intelligence community satellites. So we also have the ability to go down range into medium and lower, as well as geosynchronous orbit. So the whole playing field in national defense space is open to Lockheed Martin and what we're doing in the business is we're introducing these 21st century technologies and taking advantage of that space platform...We have a broad space strategy which is to take 21st century networking, storage, and compute technologies into our Space domain as really a competitive advantage versus other defense contractors that don't have that asset available to them."

Lockheed's space strategy is deliberately broad, taking advantage of the sprawling defense titan's scale and reach. This will help the company position itself to take full advantage of the myriad developments rippling across the space sector, as well as providing a wide pipeline for both government contracts and space economy opportunities.

2021: A space odyssey

Lockheed has already started 2021 on a strong footing, having secured a massive contract in January to support the ongoing development of the Space Force's Next Generation Overhead Persistent Infrared, or Next Gen OPIR, ballistic missile detection system. The contract will support the manufacturing and testing of three geosynchronous satellites that the Pentagon hopes will replace the aging Space-Based Infrared System.

According to aerospace analyst Dhierin Bechai, the $4.9 billion Next Gen OPIR contract accounted for a remarkable 75% of the value of all government contracts awarded to Lockheed in January. Unsurprisingly, this has pulled Lockheed's Space segment into investors' focus as never before. As a result, this will be the segment to watch in 2021.

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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