Why Lockheed Martin Stock Is A Good Bet In Spite Of The Soft 2016 Guidance

  • Lockheed Martin has exceeded both top and bottom line expectations in its Q4 2015 earnings report.
  • The company has however issued rather soft guidance for 2016.
  • Here's why Lockheed Martin stock is worth a look in spite of the weak guidance.

Lockheed Martin (NYSE:LMT) has announced Q4 and full year 2015 results that topped Wall Street earnings estimates. The giant defense contractor reported revenue of $12.92B, good for 3.1% Y/Y growth and $560M higher than consensus analysts’ estimates while non-GAAP EPS of $3.01 was up 6.7% Y/Y and beat estimates by $0.07.

Lockheed Martin’s segment performance was mixed: Aeronautics sales were up 6%; Missile and Fire Control up 0.75%, Mission Systems and Training revenue climbed 13.6%. Space Systems and Information Systems, however, declined by 8% and 6.3%, respectively.

Lockheed Martin reported that it generated $1.4B cash from operations during the fourth quarter and $5.1B for the full year. Meanwhile, Lockheed Martin’s order backlog reached a record of $99.6B, partly aided by Sirkosky’s $15.6B order backlog. Lockheed Martin completed its $9B acquisition of Sirkosky Aircraft in November 2015.

Lockheed Martin announced that it will divest its under-performing Information Systems & Global Solutions (IS&GS) unit and combine it with defense company Leidos (NYSE:LDOS) in a deal valued at $5B, comprising $1.8B cash to be paid to Lockheed and the rest to be paid in Leido stock. Lockheed Martin shareholders will automatically own 50.5% of the post-merger company. Wall Street, however, expected Leidos to pay $6B for the subsidiary.

Leido’s plans to pay a $1B special dividend to its shareholders, which implies Lockheed Martin shareholders will end up getting a good chunk of the money.

Weak 2016 Guidance

Everything was okay up to that point, until Lockheed Martin issued soft 2016 guidance. The company said that it expected 2016 sales of $49.5B-$51.5B, with the midpoint being higher than Wall Street’s consensus of $49.52B. However, the projected EPS of $11.45-$11.75 was considerably lower than consensus of $12.23. Lockheed Martin’s guidance certainly doesn’t appear good when you throw in the fact that the sales figure includes a full year of Sirkosky Aircraft sales as well as a good amount of IS&GS sales, since the divestiture of the IT division will not be completed until the second half of 2016. Sirkosky had annual sales of $7.5B in 2014 while Lockheed’s IS&GS has annual sales of ~$6B.

Lockheed Martin shares sold off by as much as 7% on account of the lower-than-expected cash on Leidos deal as well as Lockheed Martin’s rather weak guidance. The shares, however, managed to pare back their losses to close the day only 1% lower.

Lockheed Martin Stock Remains A Good Defensive Pick

At this point, it’s not 100% clear why Lockheed Martin issued lackluster guidance for 2016 since it will divest its under-performing IT unit and has acquired Sirkosky to lower its reliance on less profitable government services. Investors were expecting more upbeat guidance since the infamous defense budget cuts have already started moderating.

A likely explanation for Lockheed’s soft guidance is that the company is simply being cautious as it begins to see solid gains in its F-35 project after years of disappointment. Investors should take note of the fact that the 3.1% top line growth posted by Lockheed during the fourth quarter is a good improvement over the full-year average revenue growth of 1%. Meanwhile, the company’s shares yield a healthy 3.1% while the company has been growing dividends at a healthy 20% CAGR over the past five years. Lockheed Martin has enough cash in its books and a moderate dividend payout ratio of 53% which makes it relatively easy for the company to grow dividends at 10%-15% over the next 3-5 years.

Lockheed Martin shares remain a good defensive pick right now.

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