Foolish Forecast: Lackadaisical Lockheed

Can anyone remember the last time defense-contracting juggernaut Lockheed Martin (NYSE: LMT  ) failed to destroy an earnings estimate? I can, but I had to cheat and check the records on Earnings.com. It's been 17 quarters -- more than four years -- since Lockheed let anyone down. Can these guys keep the streak alive when first-quarter 2008 numbers come out tomorrow?

What analysts say:

  • Buy, sell, or waffle? Twenty analysts keep Lockheed on their radar, giving it a dozen buy ratings and eight holds.
  • Revenue. On average, analysts expect sales to rise 4.4% to $9.69 billion.
  • Earnings. Profits may eke out a 2% rise to $1.63 per share.

What management says:
Ugh. Those are hardly the kinds of numbers investors usually seek when choosing an investment. Investments are supposed to grow -- not just tread water. But perhaps this first quarter is just a blip. Things will pick up as the year progresses, right?

Wrong. According to the guidance Lockheed gave last quarter, the company plans to keep on treading water all year long: Revenue should approximate $42.3 billion, cash from operations perhaps $4.2 billion, and profits about $7.15 per share. Basically, we're looking at growth of between 0% and 2% across any metric you care to look at.

What management does:
And yet, for two years straight, the defense contractor has expanded its profit margins at all three key levels -- gross, operating, and net, quarter after quarter and year after year. Lockheed's operating margin now tops those of fellow aerospace stars Northrop Grumman (NYSE: NOC  ) and Boeing (NYSE: BA  ) .

Still, it trails more of its defense contracting brethren than it leads: Textron (NYSE: TXT  ) , L-3 Communications (NYSE: LLL  ) , Raytheon (NYSE: RTN  ) , and General Dynamics (NYSE: GD  ) all trump Lockheed in the operating-margin race.

Margins

9/06

12/06

3/07

6/07

9/07

12/07

Gross

9.5%

9.9%

10.1%

10.4%

10.7%

10.8%

Operating

7.5%

8.6%

9%

9.3%

10%

10.2%

Net

6.1%

6.4%

6.6%

7%

7.1%

7.2%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Perhaps this explains how Lockheed has managed to surprise the "experts" for so many years now. Expectations for the company are low, and management guidance seems intent on keeping them there.

Much as I admire Lockheed's achievements, it seems to me that the practice of underpromising today in order to overdeliver tomorrow seems destined to keep the stock's price stagnant this year. The company's sub-rate-of-inflation, single-digit growth promises can hardly be expected to excite growth investors. Its meager 1.6% yield won't be attracting dividend collectors any time soon. And value hounds (such as yours Fool-y) are likely to turn up their noses at the company's 15 P/E ratio.

Although I assume Lockheed will break out of its 1%-2% growth rates eventually, analysts are still only projecting about 11.5% annual growth for the company over the long term -- and to my mind, that just doesn't justify the 15 P/E.

Then again, all of the above is based on Lockheed's own projections. I'm willing to reevaluate if the company can become just a bit more optimistic. So come on, Lockheed. Surprise me.

Read up on recent Lockheed news in:


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