Lockheed Martin Reports Steady Growth
We increased our fair value estimate for the wide-moat company.
Wide-moat-rated Lockheed Martin (LMT) reported a strong first quarter, as sales rose 3.9%, slightly below FactSet consensus estimates, and diluted earnings increased 7.9% to $6.56 per share, above FactSet consensus estimates. After adjusting our forecasts with the updated information, we’re increasing our fair value estimate to $436 per share from $433 due to the time value of money and somewhat lower capital expenditure expectations, though these factors are partially offset by slightly lower margins.
Lockheed increased sales in all segments, but sales in the aeronautics segment were relatively flat. The company delivered five fewer F-35s, which make up about 70% of segment revenue, because of the ongoing effects of COVID-19 on manufacturing and because this quarter had one less week than the first quarter of 2020. We think that flat sales on declining deliveries is tangible evidence of the firm’s growing F-35 sustainment revenue, which is a major driver of our growth forecast. We think the segment has room to grow its top line under the assumptions that F-35 production returns to peak levels and that sustainment revenue incrementally adds to growth.
Segment margins, which exclude the effects of government reimbursement of pension expenses, decreased 25 basis points due to margin compression in the firm’s space segment. The margin compression was a function of not having the equity earnings from a launch event in the United Launch Alliance joint venture and lower risk retirements, which are step increases in percentage of completion contracts. Management gave some longer-term guidance on margins, broadly suggesting that large segments of the firm’s portfolio are shifting more toward the development of new products than reaping cash from efficiencies in existing programs. We’ve slightly decreased our margins on this guidance, but we are maintaining our 11% midcycle segment margin, as we believe these development programs will not perpetually deteriorate margins.
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Burkett Huey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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