EUR 850.00 For Business Accounts Only

Morningstar | Lockheed Is Capitalizing on an Upturn in Defense Spending With the F-35 Continuing to Drive Growth

As the world's largest defense contractor, Lockheed Martin derives about 60% of sales from the U.S. Department of Defense, roughly 10% from U.S. government agencies, and nearly 30% from international sales. Lockheed's incumbent position, divestment of noncore businesses, and headcount reductions have enabled it to weather the downturn in defense spending. The company has capitalized off a rebound in defense spending under the Trump administration, and we project at least 5% year-over-year growth in 2019 and 2020. Aeronautics, which we forecast at just over 40% of 2019 revenue, houses fighter aircraft such as the F-22, F-35, and F-16, as well as transports like the C-130J. Total F-35 quantities are projected at just over 2,400 for the U.S., versus an original baseline of about 2,800. At the end of 2018, Lockheed had delivered over 350 F-35s. Despite incessant headlines targeting the program's cost and performance, we view the F-35 as a growth and profit driver. Buys may be stretched out over the next decade, as the Department of Defense attempts to contain annual outlays for the program but we don't think large cuts in total F-35 production will occur. By 2020, we project the F-35 accounting for 31.5% of total revenue.Rotary & mission systems will account for roughly one quarter of 2019 sales; this segment focuses on combat ships and naval electronics, and the 2015 acquisition of Sikorsky expands this business into helicopters. We believe Sikorsky will continue to face headwinds in its commercial business but the transition to production on military programs in 2020 and beyond should boost growth. The remaining two segments, missiles & fire control and space systems, compose just over 30% of sales. Missiles & fire control is benefiting from Department of Defense investments in missiles and will be the fastest growing unit through 2021.We like Lockheed’s portfolio of franchise programs, combined with its solid management team, which continues to focus on returning excess cash to shareholders. We believe U.S. defense outlays, which lag the budget, will continue to grow over the next few years and that wide-moat Lockheed is well-positioned to capture this upcycle.