Zacks_Analysts' Blog : Neutral on Lockheed Martin - Analyst Blog

We maintain our ‘Neutral’ rating on a long-term basis (6-12 months) on the defense behemoth Lockheed Martin Corporation (LMT) as we expect the stock to deliver lower results in 2011 as top line seems to decelerate taking profits down. Looking ahead, Lockheed expects its fiscal 2010 earnings to come in at $6.75 - $6.95 with revenues in the range of $44.9 billion-$45.9 billion. The Zacks Consensus earnings estimates for the fourth quarter, fiscal 2010 and fiscal 2011 are $2.13, $7.28 and $6.57, respectively.

Currently, Lockheed Martin has a Zacks #3 Rank, which implies a short-term ‘Hold’ rating. Near-term, the stock is expected to perform in line with the market. However, we prefer the Zacks #2 Rank stock (Buy) like Empresa Brasileira de Aeronautica S.A. (ERJ). Empresa Brasileira looks attractive in the near-term due to its diversified presence in both the defense and corporate jet market along with strong support of the Brazilian government.

Based in Bethesda, Maryland, Lockheed Martin is a global security company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The company’s major customers include the U.S. government, foreign governments, and other commercial buyers. The company employs about 133,000 people worldwide.

The world’s largest U.S. defense contractor, Lockheed reported disappointing numbers in the most recent quarter, with EPS of $1.57 missing the Zacks Consensus Estimate and lagging the year-ago quarterly numbers.

Lockheed continues to benefit from strong defense spending on a number of its platform programs like the F-35 Lightning II Joint Strike Fighter, C-130 Hercules transport aircraft, the Patriot Advanced Capability-3 (PAC-3) and many others.

However, the threat of cutbacks in the 2012 defense budget may largely drive down Lockheed’s future topline as a major portion of its business comes from the U.S. government.

The tepid recovery of the U.S. economy raises fears of cutbacks in the defense budget of 2012. The Zacks forecast of GDP growth for the final quarter of 2010 is now at just around 1.7%. This culminates into a GDP growth rate of 2.3% for fiscal 2010. We now see greater downside risks to the GDP forecast for the U.S. economy in the near term, which may affect government spending on defense.

Additionally, a receding order backlog, headwinds in margins, execution risk of major programs, cost over-runs, higher pension liability as well as risk regarding retrenchment cost recovery, are other factors plaguing the stock's outlook.