Lockheed Martin Flexes Muscles but F-35 Concerns Linger

The aerospace giant posts better-than-expected earnings and revenue in what's supposed to be a transition year. But F-35 funding questions, plus new Turkey worries, are weighing on shares.
By Lou Whiteman ,

Lockheed Martin (LMT) - Get Report  flexed its considerable muscle in the second quarter, generating a higher-than-expected profit and sales and raising full-year forecasts. Not bad for what is supposed to be a transition year.

The Bethesda, Md.-based defense titan reported a profit of $1.02 billion, or $3.32 a share, on $12.91 billion in revenue, ahead of consensus estimates for profit of $2.94 a share on sales of $12.55 billion. The company also said it expects to report $12.15 to $12.45 in earnings per share for the year, up from earlier guidance for a profit of up to $11.80 a share on revenue of up to $51.5 billion.

Lockheed, the world's largest defense contractor, benefited from a few unexpected items including a better-than-expected contribution from its United Launch Alliance joint venture with Boeing. Lockheed Chief Financial Officer Bruce L. Tanner, on a call with investors, admitted that even the raised full-year guidance could be conservative should similar windfalls materialize in the second half, but said the company would rather be cautious in its projections.

"We definitely have opportunities in the second half of the year, but we have to make those opportunities happen," Tanner said.

Lockheed is generating strong results in what was supposed to be a transition year, as it digests its $9 billion acquisition of helicopter manufacturer Sikorsky Aircraft while spinning its IT business into Leidos Holdings (LDOS) - Get Report in a deal valued at $5 billion. But the company has made strong progress working out the bugs in its F-35 fighter program, the most expensive armament program in history, and overall all but one of the company's five segments generated sales that came in ahead of estimates.

Lockheed Martin is held in Jim Cramer's Action Alerts PLUS portfolio. Cramer and Jack Mohr, director of research, in a note Tuesday said "we applaud management for its continued ability to deliver in the face of uncertain macroeconomic conditions." But Cramer and Mohr also agreed with management's cautious guidance, especially in light of the Sikorsky deal and pending Leidos transaction, saying "by taking a conservative approach against the backdrop of both transactions along with general global uncertainty, Lockheed's management team provides a risk buffer and leaves room for upside."

Company executives said they are pleased with the initial response to the Sikorsky deal, saying they received good feedback at the recently completed Farnborough Airshow about Sikorsky Black Hawk helicopters armed with Lockheed-made missiles.

But Lockheed also warned that the F-35 production cannot be sustained without a new production contract from the Pentagon. Lockheed officials said they are in talks with the Department of Defense and are optimistic a contract will come, but the uncertainty surrounding the key program that came up during Lockheed's conference call erased what had been a nearly 3% gain -- and a 52-week high -- leaving shares trading near flat on Tuesday afternoon.

Turkey is another potential stress point for the F-35. The country, prior to its failed coup attempt last week, had committed $195 million to the development of the program and has commitments to order 116 of the jets. Lockheed also manufactures components including parts of the center fuselage in Turkey, meaning a souring in relations between the U.S. and Turkey could lead to both lost sales and disruptions in the supply chain.

On the call, executives said they are assessing the situation in Turkey, with CEO Marillyn A. Hewson calling the country "a very important partner in that program."

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