Lockheed Martin (LMT 1.05%) has been awarded a nine-figure down payment on a $15 billion missile-defense system for Saudi Arabia, a move that should go a long way toward alleviating concerns that the massive deal could be in jeopardy due to tensions between the Saudi and Western governments.
The Pentagon awarded Lockheed Martin $945.9 million for a foreign military sale to provide Terminal High Altitude Area Defense (THAAD) system long-lead items, testing and training, and initial system engineering and development. It's the first step in a larger deal struck last year between the U.S. and Saudi Arabia that will eventually see the Kingdom receive 44 THAAD launchers, missiles, and affiliated equipment.
A Lockheed Martin THAAD system. Image source: Lockheed Martin.
But following the Saudi-linked killing of journalist Jamal Khashoggi last October and criticism of the Saudi role in an ongoing civil war in Yemen, some in the West have called for a rethinking of the U.S. relationship with Saudi Arabia and of existing military deals with its government. This initial award is a good sign for Lockheed Martin investors that the THAAD deal will proceed as planned.
Check out the latest earnings call transcript for Lockheed Martin.
Arms deals under scrutiny
The THAAD system is designed to shoot down short- and medium-range ballistic missiles on their descent. The Lockheed-manufactured system with Raytheon (RTN +0.00%) radars attracted attention in the last year as the primary U.S. deterrent to North Korean rockets over the Pacific. It's also a potential deterrent to Iran, which is why the system is of interest to both Saudi Arabia and Israel among other U.S. allies in the region.
The $15 billion THAAD agreement was one of the few specific deals reached as part of a comprehensive $110 billion U.S./Saudi arms package negotiated in 2017. In recent months, government and defense-industry officials, according to reports, have been scrambling to get deals finalized out of concern there could be sanctions against the Saudis over the Khashoggi death.
The Saudi THAAD deal appears safe, but other contractors have not been as fortunate. General Dynamics (GD 1.11%) in January warned investors that cash flow generated by the company's land-systems business was "significantly impacted" by diplomatic issues between Canada and an unnamed customer. Though the company offered few other details, General Dynamics in December launched a public campaign against attempts by Canadian government officials to block a $13 billion sale of Canada-made armored vehicles to the Saudis.
Lockheed is a long-term winner
Investors had assumed the General Dynamics trouble was more of an outlier than a precursor to a larger issue, in part because the U.S. government has maintained tighter relations with the Saudis than Canada has throughout the recent controversies. Still, it's a sigh of relief to see tangible evidence that the agreement is moving forward.
Though Lockheed Martin is best known for the F-35 fighter, missile defense is a strong and growing part of the portfolio. In addition to its work in the Middle East and Asia, the company late last year won a high-profile contract to defend Hawaii from a potential attack.
Lockheed Martin ended 2018 with a backlog of more than $130 billion, but management offered only tepid guidance for 2019 growth, in part because of political and geopolitical uncertainty. There's still a lot that can go wrong in that area, most notably a potentially contentious budget debate between the White House and Congress, but with the Saudi deal proceeding, that's one less thing for investors to worry about.
Looking past 2019, Lockheed Martin has a portfolio of essential defense programs unmatched in the industry and is set up well to be an outperformer. Slowly but surely, the clouds hanging over the current year are lifting, as well.
