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Stock Analyst Update

Lockheed Martin Reports Solid Second Quarter

We are slightly decreasing our fair value estimate.

Wide-moat-rated Lockheed Martin reported a solid second quarter aside from a $250 million charge on a classified aeronautics program. Management maintained its top- and bottom-line guidance and repurchased another $500 million of stock on top of the $1 billion it repurchased in the first quarter. We are decreasing our fair value estimate to $425 per share from $436 as we incorporate Morningstar’s assumption of higher taxes in our model, but we still think the stock is somewhat undervalued. We think the significant repurchases show that management agrees with our assessment that the stock is cheap.

The firm posted sales growth of 5.0% due to mid-single-digit growth across the portfolio, with space systems outperforming the portfolio considerably. During the quarter, the company faced some pressure from customers on the cost of sustaining the F-35 aircraft, and management is pushing to have sustainment programs wrapped up into a broad performance based logistics contract that Lockheed anticipates would reduce maintenance costs by ensuring better spare-parts availability. We expect that as production stabilizes, additional capabilities will go toward ensuring the availability of spares, which should reduce maintenance costs significantly by increasing labor efficiency. Separately, Lockheed won a $5.5 billion contract to provide the F-35 to Switzerland.

Segment margins contracted 60 basis points to 10.4% due to the $250 million charge on a classified program, and EPS of $6.52 missed FactSet consensus by 0.2%. The classified portfolio generally consists of smaller programs, so we were interested to see that this charge was on a single program. We think this charge may be an early indication that Lockheed has a position on the secretive Next Generation Air Dominance platform. Otherwise, margins expanded across the rest of the portfolio, likely due to easy comparisons in the second quarter of 2020 because of manufacturing holdups during the pandemic.

 

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