Aerospace giant Lockheed Martin (LMT 1.23%) disappointed investors last week, sending its share price down 3.5% in the week since earnings came out. Despite the shooting war ongoing in Europe, sales at this defense contractor declined 8%, and profits per share slipped 2%.
America's Defense Department isn't doing much to make investors happier with Lockheed Martin either. As Bloomberg reported in March, the Pentagon was expected to request funding from Congress to purchase 94 of Lockheed's famous F-35 "stealth" fighter jets in its fiscal 2023 defense budget. The Pentagon shocked defense investors, however, by cutting its order by 35%, and now seeks funding for only 61 of Lockheed's fighter jets.
This sounds like more bad news for Lockheed Martin, but as management revealed in a conference call with analysts last week, some white knights are riding in to save the day -- and give Lockheed's all-important aerospace division a boost.
Image source: Getty Images.
1. F-35s for Europe and Canada
This was the first of three key revelations investors may have heard about when listening in on Lockheed's call with analysts. (But if you didn't have time to listen, or to read the transcript of the call later on, don't worry -- we already did, so you don't have to!)
Downplaying the Pentagon's curtailing its shopping list, Lockheed CEO James D. Taiclet noted that Germany is buying 35 F-35s for the Luftwaffe, and Canada will purchase 88 F-35s for the Royal Canadian Air Force. Combined with additional orders from Switzerland and Finland, Taiclet calculates that Lockheed may add as many as 223 international F-35 sales to its order book, far outweighing the 33-plane reduction from the Pentagon.
For that matter, Taiclet noted that while "the initial quantity of F-35 ... requested in the FY '23 President's budget submission was below our expectations," this 33-plane shortfall could still be made up, as the planes remain on the Pentagon's "unfunded priority list" -- weapons the Pentagon wants to buy if Congress can find the funds for them.
2. To infinity and beyond
Next up, a few words on Lockheed Martin's eccentric space business. In Q1, if you recall from last week's report, "space" was the single Lockheed division to post improving year-over-year profits, up 8% -- and it did this despite revenue declining 15%. On the conference call, Lockheed CFO Jesus Malave explained that space sales "declined by approximately $450 million due to the nationalization of the Atomic Weapons Establishment program." Nevertheless, "operating margins were higher at Space ... driven by additional ULA equity earnings."
That's quite a revelation, given that my impression has been that ULA -- the United Launch Alliance joint venture that Lockheed owns along with Boeing (BA 1.51%) -- has been winning lower and lower launch prices as it's forced to compete with SpaceX on price. If ULA -- and now Lockheed -- are earning better profit margins despite charging lower prices, then that speaks to rather dramatic improvements in efficiency at ULA, which is good news for Lockheed as well.
And going forward, Lockheed has the potential to grow both sales and earnings. As CEO Taiclet noted, he's "very excited" that Lockheed has won a $700 million contract to build 42 small Low Earth Orbit satellites for the Space Development Agency's "transport layer tranche 1," on top of an earlier contract to build 10 "tranche 0" satellites in 2020.
3. Doing well by doing good
Final point: In his comments on the conference call, CEO Taiclet argued that in 2022, "national security and human security" may be getting grouped "equally with other ESG topics like corporate governance and global warming, climate change."
On its face, this seems a controversial assertion. Historically, defense contractors have caught a lot of flak from socially progressive investors for being in the business of building bullets and bombs -- items that don't usually fall within the rubric of environmental, social, and governance (ESG) investing. Certain large investors -- Norway's largest pension fund, for example -- even went so far as to "divest" from their ownership stakes in defense companies. This aversion to military business appears to be changing, though, in the context of the war in Ukraine, which even progressives view as a "just war."
As Taiclet opined: "I think people are starting to recognize that [defense] is not an anti-ESG industry. You could call it neutral or [even] positive [because] we're trying to maintain the conditions where people can live safe, happy, lives and the economy can flourish, especially a free market economy."
And granted, that may involve a certain amount of wishful thinking on this defense company CEO's part. But I have to say -- I don't see a whole lot of criticism of Lockheed Martin's business building Javelin missiles for Ukraine's army, for example, on social media lately. The opposite is more accurate. And we're starting to see investment funds reversing course and reauthorizing investment in defense stocks as a result.
Whether this is a fluke or a trend remains to be seen. If the latter, though, it's probably going to be good news for Lockheed Martin's stock price.
