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Foolish Forecast: Looking for Lockheed

By Rich Smith – Updated Nov 14, 2016 at 10:39PM

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'Tis the season for earnings reports, and in particular, for defense contractors. All the big names are coming out with their Q2 news -- United Technologies (NYSE:UTX) and Textron have already reported. Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC) will report on Tuesday. Boeing (NYSE:BA) and General Dynamics (NYSE:GD) will release results on Wednesday. L-3 (NYSE:LLL) and Raytheon (NYSE:RTN) play rear guard on Thursday. It'll take some time to get to them all, but we're going to preview 'em all for you right here. Up today: Lockheed Martin.

What analysts say:

  • Buy, sell, or waffle? Twenty-one analysts keep Lockheed on their radar. Ten rate it a buy, and 11 say hold.
  • Revenues. On average, they're looking for 3% sales growth to $10.24 billion.
  • Earnings. Meanwhile, profits are predicted to increase 14% to $1.53 per share.

What management says:
Late in 2006, CEO Bob Stevens was predicting 6% revenue growth for this year, and just 2% growth in profits per share (to as much as $5.60), and about $3.8 billion in operating cash flow. Encouraged by a bumper crop of profits last quarter, though, he decided to up his numbers in April.

At last report, Lockheed expects to earn $6.20 to $6.35 per share this year on $40.4 billion to $41.4 billion in revenue. Moreover, from a cash profits perspective, the prediction is for more than $4 billion in cash flow from operations for the year.

What management does:
Sales growth of 3%, but profits per share rising perhaps three times as fast? Yep, you read that right. How the firm pulls that off consists of two parts: (1) reducing its share count, so that firmwide profits get concentrated among fewer and fewer shares (Lockheed bought back nearly 2% of its shares outstanding last quarter alone); and (2) extracting greater profits from its revenue through rising margins. Like so:

Margins

12/05

3/06

6/06

9/06

12/06

3/07

Gross

9.0%

9.2%

9.3%

9.6%

10.2%

10.4%

Op.

7.2%

7.7%

8.0%

8.5%

9.2%

9.7%

Net

4.9%

5.4%

5.6%

6.1%

6.4%

6.6%

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:
Lockheed divides its business into four main segments: aeronautics, electronic systems, space systems, and information systems and global services. Respectively, these four segments account for 29%, 28%, 20%, and 18% of revenue. As of last quarter, the middle two segments provided the most bang for the buck, with both electronic systems and space systems boasting double-digit operating margins. The fact that the firm's biggest division, aeronautics, produced just a 9.4% margin helped dampen the overall operating margin to where you see it stand today, at 9.7%.

If all of this sounds remarkably similar to what I said today in a story about Northrop, well, that's intentional. The situation is eerily similar, even if the names of the divisions differ somewhat. Where the two contractors' stories diverge is on the trend. Whereas at Northrop the margin of its biggest moneymaker declined year over year last quarter, at Lockheed, all four divisions reported improved operating margins in April -- and Lockheed's biggest division, aeronautics, showed its best improvement -- with 60 basis points added.

That, Fools, is how Lockheed can take a slow-growth year for sales, and against all odds transform it into respectable growth in profits.

Read up on recent Lockheed news in:

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Fool contributor Rich Smith does not own shares of any company named above.

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Stocks Mentioned

Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
LMT
$413.07 (-2.13%) $-9.01
The Boeing Company Stock Quote
The Boeing Company
BA
$131.26 (-5.37%) $-7.45
Raytheon Technologies Corporation Stock Quote
Raytheon Technologies Corporation
RTX
$82.03 (-1.70%) $-1.42
L3 Technologies, Inc. Stock Quote
L3 Technologies, Inc.
LLL
General Dynamics Corporation Stock Quote
General Dynamics Corporation
GD
$221.90 (-2.71%) $-6.19
Northrop Grumman Corporation Stock Quote
Northrop Grumman Corporation
NOC
$478.82 (-3.55%) $-17.64
Raytheon Company Stock Quote
Raytheon Company
RTN

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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