Dear owner of Lockheed Martin (LMT 1.39%) stock -- past, current, or prospective:
Here at The Motley Fool, we know you've got a life. Between working while the sun shines and catching Z's when it doesn't, you may find it hard to keep up to speed on Wall Street events -- corporate "post-earnings conference calls," with stock analysts for instance.
These calls ostensibly benefit investors, but they usually take place in the early morning or late afternoon when ordinary investors are, you know, working -- or commuting to and from work. The result? All too often, investors don't ever hear the news that management thinks they need to know.
That's where I come in. I listen to the conference calls -- just in case you don't have time to.
Lockheed Martin's "family photo" of the three F-35 variants (right to left, the Air Force F-35A, Marine Corps F-35B, and U.S. Navy F-35C). Photo: Lockheed Martin
Today, I'm recapping the news from Lockheed Martin's July 22 earnings call with stock analysts. Without further ado, here are a few of the things that management wants you to know about its business -- and the facts that investors need to know to put these things in context:
We're huge in ... space
"Mission Systems and Training's competitive win of the Space Fence program ... will enable our corporation to provide a critical capability to our nation for tracking more than 200,000 orbiting space objects and increase the ability to prevent collisions with space-based debris."
When Lockheed Martin paid consultant Loren Thompson published an article in Forbes earlier this year, warning that a new law under consideration in Congress "would effectively bar [Lockheed] from the military launch market," that got a lot of investors worried. After all, Lockheed Martin is one half of the United Launch Alliance space launch duopoly. As such, it gets one half of ULA's $1 billion-a-year retainer to stand ready to send satellites into space for the Pentagon -- and gets even more money when it actually launches a rocket.
Personally, I think the whole controversy is overblown. But even if it isn't -- even if Lockheed Martin is at risk of losing some of its Pentagon space launch business -- the company still has a sizable space business remaining to it. Take the "Space Fence" program for example.
Lockheed reminded investors that it's won this U.S. Air Force contract, and emphasized the importance of a program that will help satellite launchers track and avoid 200,000 pieces of space junk when sending their payloads into space. But for investors, "200,000" isn't necessarily the most important number. More important is the size of the contract Lockheed Martin won to build the Space Fence -- $914 million. That's on top of the $1.6 billion already sunk into Space Fence by the U.S. Air Force. What's more, the 200,000 number refers only to "softball-sized" or larger pieces of space debris. Given that there are actually an estimated 500,000 bits of smaller-sized space junk floating around up there, there's plenty of potential for the Space Fence to grow in size, and in value, as Lockheed gets better and better at tracking smaller and smaller pieces of junk.
Really, really huge
"Our team was able to expand a key franchise program with a receipt of additional production lots for spacecraft 5 and 6 on the Space-Based Infrared System, SBIRS. SBIRS spacecraft provide essential missile defense and warning capability to our nation and allies to counter the growing proliferation of offensive ballistic missiles around the world. These two awards expand our backlog at work and help position our corporation for long-term growth in core markets."
Like Space Fence, SBIRS is a U.S. Air Force program, this one geared toward maintaining an overwatch of hostile missile launches from the ground. It's also even more lucrative for Lockheed Martin than is Space Fence -- at least for now. The fifth and sixth Geosynchronous Earth Orbit, or GEO, satellites to which Lockheed is referring in this update, for example, are worth at least $1.86 billion to Lockheed. And at last report, the Air Force was still expected to place orders for as many as 24 SBIRS satellites.
Closer to Earth
" We were particularly pleased to announce that we secured a letter of intent for our new LM-100J commercial airlifter. This customer has the opportunity to purchase up to 10 aircrafts, and we believe the potential demand for this airlifter will only grow in the future."
Derived from Lockheed Martin's long-lived -- and immensely popular -- C-130J Super Hercules military transport, the civilian analog LM-100J aims to capitalize upon its military cousin's success. Lockheed announced plans to launch the LM-100J for production as a "civil multi-purpose air freighter capable of rapid and efficient transport of cargo" in February. In particular, Lockheed sees the robust airframe as ideal for taking off from and landing on "short, unprepared airfields without ground support equipment."
Lockheed describes the new plane as ideal for such missions as fighting forest fires, transporting cargo to remote and "austere" locations, and medevac/air ambulance service. The fact that it's already begun to land orders for the plane has to be seen as a good sign for the plane's prospects -- and/or Lockheed Martin's efforts to diversify its business away from the shrinking military market.
Shrinking military markets -- expanding perspective
"I think we did right at or just under 20% [of total revenues from international customers] in the quarter. So ... we're hitting our number. The goal is clearly to be higher ... if we do what we believe we'll do from an order perspective this year and we end up at the backlog level that we're hoping for, probably 30% of that backlog could be international business."
Whether it's the "goal" or not, selling military hardware internationally has never been Lockheed Martin's strongest suit. While the company's warplanes are undeniably popular internationally, the fact remains that at last report, Lockheed Martin was one of the worst defense companies when scoring for international sales as a percentage of total sales, lagging Boeing, Raytheon, and General Dynamics in that race. Last year, only about 17% of Lockheed Martin's total revenues came from beyond U.S. borders.
Lockheed's recent move toward 20%, therefore, will mark a big change in where the company gets its revenues from. In fact, a move to 20% could conceivably lift Lockheed to second place among pure-play defense industry companies -- and a move to 30% would put the company at the head of the pack.
If defense spending continues to fall here in the U.S., that's exactly where Lockheed Martin wants to be: first among defense contractors making sales abroad.
The elephant in the room
"Our recently announced Blueprint for Affordability agreement with the Department of Defense on the Joint Strike Fighter program ... is designed to reduce the price of a new F-35 to under $80 million ... by 2019 at a level at or below the price of the fourth generation fighters. Achievement of cost reductions will enable domestic and international customers to buy a fifth generation fighter with its far more advanced technology and capabilities as they capitalize their fighter fleets."
Of course, no discussion of Lockheed Martin stock would be complete without a mention of the F-35 Joint Strike Fighter -- a plane that's expected to generate upward of $1.3 trillion for Lockheed over the next six decades, and that could account for as much as half the company's revenues over that period.
Key to hitting Lockheed's target of selling 3,100 or more copies of the F-35 in the U.S. and abroad, however, will be the company's ability to get the price down. In a controversial report in July, Fox News quoted defense analyst Winslow Wheeler arguing that the production costs of U.S. Navy F-35C models are now running at $337 million per copy, with Marine Corps F-35Bs not far behind at more than a quarter-billion dollars per unit, and Air Force F-35As selling for a less pricey, but still substantial, $148 million apiece.
Granted, Wheeler's calculations are not universally accepted. Defense tech website Deagel.com, for example, puts the average price of all F-35 models at just $154 million apiece. But even that number is nearly twice the price that Lockheed Martin has been promising. So how will Lockheed get the price down to $80 million or below?
CEO Marillyn Hewson says that just ramping sales volumes alone will be enough to achieve "probably 75% to 80% of the cost reduction" Lockheed is aiming for. Then again, if Lockheed Martin wants to win the orders needed to ramp sales, the best way to do would be ... to cut the cost.
So right here you see that Lockheed Martin is facing a bit of a "chicken or the egg" problem with its F-35 program. Just making yourself aware of that dilemma is probably worth the price of admission to listening in on Lockheed Martin stock's conference call. And lucky you -- you didn't even have to!
Two Lockheed Martin F-35s in flight. To sell one, you have to reduce the price of the other. But before you reduce its price, first you have to sell them both... Photo: Lockheed Martin
