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Morningstar | Lockheed's 4Q Results on Target; No Major Surprises in 2019 Guidance

Wide-moat Lockheed Martin reported fourth-quarter and full-year 2018 results that were in line with consensus expectations. Guidance for 2019 growth and profits didn't differ materially from the outlook provided last year, but the refined cash flow guide is slightly better than we expected even though it was primarily due to timing on receivables. The EPS range of $19.15-$19.45 came in a bit below consensus. We're maintaining our $329 fair value and shares look slightly undervalued.

Fourth-quarter revenue grew 4% over the prior period with missiles & fire control boosting growth (22% year over year) thanks to classified work, missile defense, and PAC-3. Although F-35 revenue increased year over year, aeronautics only grew 4% and operating margins contracted by 100 basis points versus the fourth quarter of last year due to lower F-35 risk retirements, resulting in a less favorable booking rate. Consolidated backlog rose $25 billion for full-year 2018 with an F-35 economic order quantity accounting for $19 billion of this increase.

For 2019, management guidance features 5% year-over-year revenue growth at the midpoint coupled with broadly flat operating margins at the segment level (10.8% for 2019 versus 10.9% in 2018). Margins should come in flat year over year in 2019 at the aeronautics and RMS units but move up slightly at missiles & fire control. Space systems margins will contract in 2019 (guidance calls for about a 120 basis points fall) but management did upgrade its outlook slightly for this business--Lockheed anticipates a $100 million year-over-year headwind versus $150 million previously--due mainly to a launch vehicle slipping into 2019. Thanks to increasing DoD outlays, we think there is potential upside to revenue even at the upper end of the guidance range, which calls for 6.5% growth. Operating cash flow guidance for 2019 stands at $7.4 billion or greater driven by profit growth and by invoices that will unwind drifting into 2019.

The F-35 continues to drive growth for Lockheed and we project that the program will comprise at least 30% of revenue by early next decade. For 2019, Lockheed anticipates deliveries coming in at 131 aircraft compared with 91 last year and margins that should expand by around 50 basis points on the program. Lockheed continues to guide to increasing deliveries each year through 2021. Specifically, management anticipates around 160 deliveries in 2021, which is still about 20 aircraft below the company's manufacturing capacity on the F-35. Lockheed management also mentioned the possibility of a multiyear procurement on the F-35--the EOQ is like a multiyear but not quite the same and crucially doesn't require Congressional approval--around the 2022 timeframe.