News broke on Friday evening that catches one's eye, if one tends to watch the defense and aerospace industries closely.
The U.S. Air Force awarded a contract to Lockheed Martin (LMT) worth a potential $7.2 billion to produce as many as 22 additional GPS III satellites. This is an option-based contract that could be exercised in part or in whole, which would be in addition to the 10 satellites of this type that Lockheed is already producing for the Air Force.
These advanced satellites, which will be manufactured in the Denver, Colorado suburb of Littleton, will improve both accuracy for navigational purposes, as well as security against cyber attacks. This new satellite, which is not expected to take the field until 2026, will also emit a signal more compatible with satellites currently used by European nations.
This, at least to this investor, is the deal here. As you all know, the federal government's fiscal year ends within two weeks. For any unspent defense money, this becomes crunch time. In other words, it's use it or lose it.
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You kids ever hear of the Air, Space, & Cyber Conference? This aerospace dog and pony show kicks off today and will run through Wednesday at National Harbor, Maryland. The event is hosted by the Air Force Association. Not only will a plethora of high-ranking officers speaks at this event, but you can expect to hear from SpaceX COO Gwynne Shotwell this afternoon, and Blur Origin founder -- and Amazon (AMZN) CEO -- Jeff Bezos on Wednesday afternoon. Both of these appearances are scheduled for 3:40 p.m. ET.
The point that I am trying to make is that if the Air Force is going to throw money around ahead of the close of the fiscal year, this event would make for great theater. The Air Force is thought to have two potential contracts in play at this time. One would be a two-year contract to replace the Atlas 5 rocket now used to launch military payloads. The Atlas 5 is a United Launch Alliance product, which is a joint venture between Lockheed and Boeing (BA) . ULA is still in the running for some business here. Both Space X and Blue Origin are also thought to be contending, as is Northrop Grumman (NOC) .
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Then there is the much-bigger potential for some cash flow as the Air Force is expected to at some point in the near future make a move toward replacing it's tired fleet of 38C Talon trainer aircraft. This contract, according to Investors Business Daily, could be worth $16 billion, and involve an order for as many as 350 aircraft. The 38C is a Northrop product. Both Lockheed Martin and Boeing are working on separate competing joint efforts with external firms on designing suitable replacements. This contract has been delayed several times already. According to Inside Defense, this contract will likely be awarded prior to September 30... for real this time.
Lockheed's chart is something. One quickly sees that this name spiked right through a couple of points of resistance late last week. The daily Moving Average Convergence Divergence looks sharp, with all three components pulling in the same direction. Relative Strength is well... strong, and that Money Flow is just spectacular. As most of you know, I am long this name, and have been quite high on the name of late.
The entire sector has performed much better in recent weeks than it had for quite some time. I have taken some off of several of my names in this group as price has improved -- and for others, target prices have been reached. My target price for Lockheed ($333) was pierced on Friday. Discipline demands that I take something off -- and so it shall be, but it won't be much. Maybe a 10% scalp.
I like this name, and Lockheed obviously has the hot hand in the industry right now. For your information, the financial industry's average target price for this name is currently $369.88. Third-quarter earnings are not due until October 23.
- Target Price: $360 (up from $333)
- Panic Point: $312 (up from $290)
Note: I do not find options markets related to Lockheed especially liquid -- they are not priced to my liking to either take a shot there myself, or lead you, the reader, to believe that doing so would be a good idea. If that changes, I'll be on it. Right now, this is an equity play for me.
(A longer version of this column appeared at 7:33 a.m. ET on Real Money, our premium site for active traders. Click here to get great columns like this from Stephen "Sarge" Guilfoyle, Jim Cramer and other experts throughout the market day.)