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Lockheed (LMT) Up 5.3% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Lockheed Martin (LMT). Shares have added about 5.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Lockheed due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Lockheed Martin Beats on Q3 Earnings, Ups '19 EPS View

Lockheed Martin reported third-quarter 2019 earnings of $5.66 per share, which surpassed the Zacks Consensus Estimate of $5.03 by 12.5%. The bottom line also improved 10.1% from $5.14 registered in the year-ago quarter. This year-over-year upside can be attributed to solid sales and operating profit growth.

Operational Highlights

In the reported quarter, net sales amounted to $15.17 billion, which outshined the Zacks Consensus Estimate of $14.98 billion by 1.3%. The reported figure also increased 6% from $14.32 billion recorded a year ago. Notably, all segments registered year-over-year growth in sales during the third quarter, except Rotary and Mission Systems unit.

The company recorded operating profit of $1.67 billion compared with the year-ago quarter’s figure of $1.59 billion.

Backlog

Lockheed Martin ended the third quarter (on Sep 29, 2019) with $137.4 billion in backlog, up 0.5% from $136.7 billion at the end of second-quarter 2019. Of this, the Aeronautics segment accounted for $49.43 billion, while Rotary and Mission Systems contributed $31.87 billion. While Space Systems accounted for $29.09 billion, Missiles and Fire Control segment contributed $26.97 billion.

Segmental Performance

Aeronautics: Sales increased 10% year over year to $6.18 billion, primarily driven by higher net sales from the F-35 program owing to increased volume on production, development and sustainment contracts. Also, higher sales from classified development programs contributed to this segment’s top-line growth.

While operating profit improved 11% year over year to $665 million, operating margin increased by 20 basis points (bps) to 10.8%.

Missiles and Fire Control: Quarterly sales increased 14% year over year to $2.60 billion owing to higher sales from tactical and strike missiles programs. Also, higher sales from integrated air and missile defense programs contributed to this unit’s top-line growth.

While operating profit increased 5% year over year to $349 million, operating margin contracted 120 bps to 13.4%.

Rotary and Mission Systems: Quarterly sales of $3.71 billion dropped 4% from the prior-year quarter on account of lower sales from Sikorsky helicopter programs.

Operating profit declined 5% year over year to $342 million, while operating margin contracted 20 bps to 9.2%.

Space Systems: Sales improved 5% year over year to about $2.68 billion in the third quarter. The uptick was driven by higher net sales from government satellite programs, Global Positioning System (GPS) III as well as strategic and missile defense programs.

Operating profit also increased 5% to $309 million, while operating margin remained flat at 11.5% in the reported quarter.

Financial Condition

Lockheed Martin’s cash and cash equivalents totaled $2.54 billion as of Sep 29, 2019, compared with $0.77 billion at the end of 2018. Long-term debt was $12.65 billion, slightly higher than the prior year-end level of $12.60 billion.

Cash from operations at the end of third-quarter 2019 amounted to $5.82 billion compared with $0.92 billion a year ago.

During the reported quarter, the company repurchased 0.6 million shares for $210 million compared with 0.6 million shares for $216 million a year ago.

Lockheed Martin paid out dividends worth $621 million to its shareholders in the third quarter compared with the year-ago figure of $569 million.

Dividend Hike

The company increased its dividend by 20 cents per share to $2.40 per share during the third quarter. Lockheed Martin also increased its share repurchase authority by $1 billion with $3.3 billion remaining for future repurchases of common stock under the program as of Sep 29, 2019. This reflects the solid financial position that this jet-maker boasts, which, in turn must have encouraged it to hike its cash distribution to shareholders.

Guidance

For 2019, Lockheed Martin partially raised its financial guidance. The company currently expects to generate revenues of $59.10 billion compared with the earlier guided range of $58.25-$59.75 billion. The Zacks Consensus Estimate for full-year revenues, pegged at $59.31 billion, lies above the company’s updated guidance.

Earnings per share for 2019 are currently anticipated to be $21.55 compared with $20.85-$21.15 guided earlier. The Zacks Consensus Estimate for the company’s full-year earnings, pegged at $21.22 lies below the company’s updated guidance.

The company continues to expect to generate cash from operations of more than $7.6 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, Lockheed has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Lockheed has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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