Lockheed Shifts Priorities; Lowering FVE

Wide-moat Lockheed Martin LMT reported decent third-quarter results marred by unexpectedly low guidance for 2022 due to the withdrawal of the re-basing of F-35 related revenue, U.S. military presence in Afghanistan, and accelerated payments to suppliers to ensure supply chain health. Management seems to be reframing the firm’s narrative from one of low-mid-single digit growth powered by F-35 sustainment and hypersonic development to one of a relatively flat top line for the time being and balance-sheet-powered capital returns. We don’t like the unexpected shift in priorities and think this shift may be indicative of difficulties in achieving CEO Jim Taiclet’s long-term vision of applying telecom-style connectivity to military procurement. We are reducing our fair value estimate to $402 per share from $425 to reflect these headwinds, but we still think shares are undervalued.

Sales of $16.0 billion missed FactSet consensus estimates by 6.3% and declined 3.0% from the prior year. Aeronautics sales declined 1.7% despite increased F-35 deliveries due to lower development revenue on the platform. Missiles and fire control, usually a growth driver for the firm, declined by 6.4% due to lower volume on older platform products such as the Hellfire missile. The lower volume was partially a function of supply chain challenges and partially a function of the withdrawal of U.S. forces from Afghanistan. Space sales decreased 5.1% due to the U.K.’s renationalization of the atomic weapons establishment, but the $340 million headwind was partially offset by $140 million of organic growth, indicating that there is still a long runway for space militarization.

Earnings per share excluding a noncash pension settlement charge came in at $6.94, roughly 14.1% above the prior year as operating margins expanded to offset the revenue decline. The main driver for the margin increases was increased profit booking on stagnant volume, indicating efficiency improvements.

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