Hope for the Future at Lockheed-Martin

Despite a miss on its sales numbers, there's reason for optimism.
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The following analysis was published earlier today on Street Insight, and is being republished here as a bonus for TheStreet.com readers.

Despite a sales miss,

Lockheed Martin's

(LMT) - Get Report

bullish commentary and raised guidance indicate that it likely has good visibility on projects.

Investors were mildly disappointed with the earnings report, despite the defense company's slight beat of earnings estimates and its strong forward guidance.

Earnings per share was $1.60, but 21 cents of that was due to one-time asset sales and a tax-rate adjustment following an IRS audit.

"Recurring" EPS of $1.39 compared favorably with the Wall Street estimate of $1.37. But sales of $9.275 billion missed the consensus by $300 million, and organic growth was essentially flat year over year.

The company says that recently reported divestitures are creating a sales headwind, but the pipeline and backlog are fueling confidence that growth will accelerate each quarter for the rest of the year, and the organic-growth goal of 10% will be reached.

Certainly, cash flow looked good, growing by $300 million year over year, and it funded a number of capital initiatives, including massive share-buybacks, the dividend, acquisitions and capital expenditures.

Working capital improvements contributed to this gain, especially with several advances coming in earlier than expected. The company's goal is to return half of free cash flow to shareholders via the share repo and dividend.

Lockheed provided a solid improvement in guidance for 2007. The company tacked $100 million onto the low and high ends of the sales range ($40.35 billion to $41.35 billion) as a result of the MDS and RLM acquisitions. More importantly, the EPS range was raised significantly, the midpoint moving to $6.27 from $5.90.

Twenty-one cents of the gain is the asset sales and tax benefit, but nonetheless, the increase in operating guidance is still material, signifying good prospects for margin improvement.

The company noted that all segments are contributing to margin expansion, due to strong performance, success in risk-reduction and more revenue diversification.

The CFO specified that the Department of Defense should be 55%-60% of sales in 2007; 15% is international; 25%-30% intelligence/civil agencies. Some segments are diversifying more quickly, such as Electronics, which is now 30% international and growing quickly. Information Systems & Global Services will diversify even more swiftly thanks to the new acquisitions and the customer base it brings in.

The company highlighted the restructuring efforts that are now translating into margin improvements -- and sales opportunities. For instance, aeronautics and logistics are better integrated to serve the full life cycle of all planes produced.

IS&GS consolidates the entire spectrum of the company's IT expertise, enabling a focus on mission information systems while also expanding into global services. Information systems will be the growth engine of this group, while mission solutions is the core cash cow.

Given the long cycles involved in defense procurement, 2007 is probably in the bag, so investors will have to convince themselves that 2008 will be lackluster if they want a reason to sell the stock.

Solid revenue, margin improvement and adept cash flow utilization should provide good returns for LMT shareholders the rest of the year.

At the time of publication, Gary Dvorchak was long LMT. Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager which manages $140 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.