Why Lockheed Martin's Reorganization Is a Non-Event

As an investor, you know the value of reading beyond the headlines. In fact, reading between the lines of a company's big "announcement" is an even better idea. The most recent case in point is the news Lockheed Martin (NYSE: LMT  ) is realigning a couple business divisions to streamline operations. In the hyper-competitive defense and aeronautics industries, cutting overhead is always a sound move. But when you get past the headlines to the gist of the matter, Lockheed's news is hardly worth a yawn.

The background
Defense budgets are always at risk, political whims and pending elections are a constant irritant, and the number of competitors seems endless. So it's not that Lockheed's "continuing focus on lean and efficient operations" is a negative; it's not. It's simply a very small drop in a very, very large bucket as Lockheed competes against the likes of General Dynamics (NYSE: GD  ) , Northrop Grumman (NYSE: NOC  ) and industry-leading Boeing (NYSE: BA  ) for Department of Defense deals.

General Dynamics and Northrop sit at number's three and four, respectively, in defense contract revenues, behind a virtual tie at the top between Lockheed and Boeing. Raytheon's (NYSE: RTN  ) leadership in electronics and mission systems places it just below General Dynamics with nearly $10.5 billion annually so far in fiscal 2012.

And let's not forget the recently announced proposed super-merger between French-based EADS (parent of Airbus) and BAE Systems. The combination, should it come to pass, would instantly become the largest company of its kind in the world, with 220,000 employees and nearly $100 billion in annual revenues.

BAE is already the ninth largest defense contractor to the U.S., making it the biggest foreign contractor to U.S. defense efforts in the world. Add EADS and its plans for government-funded contracts to BAE, and an already competitive market becomes even more so. Not surprisingly, a deal the size of a BAE and EADS merger is running into hurdles, but it shouldn't be discounted just yet.

The "announcement"
Lockheed's big cost-cutting news includes saving $50 million a year in overhead by removing unneeded management layers in the electronic systems and global training and logistics divisions. Though that's a step, it's not much of one considering Lockheed finished fiscal 2011 with cost of revenues totaling $42.795 billion. Save $50 million a year? Yeah, whatever.

On an annual basis, it's easy to see why Lockheed might be overly excited about its minimal cost-cutting efforts. The trend is clear to see with one quick glance at Lockheed's income statement. Costs have continued to spiral upward year in and year out at Lockheed, with only incremental increases in revenue. Not surprisingly, operating income and net income results are following the same pattern.

So managing overhead is a must, but Lockheed has to go a lot further than realigning a couple of business units, letting 200 (give or take) people go, and saving $50 million annually. This is especially true in light of Lockheed's stock price valuation right now. On a P/E basis, Lockheed's 11 is currently in line with Boeing's 12.2, and with a stellar year of plane orders under its belt, along with a leading position in defense contracts, Boeing clearly warrants a significantly higher valuation than Lockheed.

In fact, Lockheed's price to earnings ratio is quite a bit steeper than that of General Dynamics, Northrop Grumman, and Raytheon; though, each of those runs much more efficient businesses. Just about any margin measurement of Lockheed's you can think of -- operating, net profit, EBITD, or gross -- falls short of its peers' measures.

A nearly 4.9% dividend yield remains Lockheed's saving grace, but until real expense cutting initiatives are in place, Lockheed will remain one of the least desirable options in the defense industry.

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Fool contributor Tim Brugger currently holds no securities positions mentioned in this article. The Motley Fool owns shares of Raytheon, General Dynamics, and Lockheed Martin. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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