Diversified aerospace company Lockheed Martin Corporation (NYSE: LMT) is a leading supplier of defense solutions and military equipment to the US government. As its activity is influenced by variations in the defense budget, the company follows a strategy based on prudent cost management and technological innovation.
When the business world was hit with widespread disruption and a supply chain crisis during the pandemic, Lockheed Martin was not spared. Sales have been affected by these temporary headwinds, but the company is on track to receive large orders from the government given the strong demand for defense equipment and combat vehicles. The business model is such that the timing of customer contracts plays a key role in revenue generation.
Lockheed Martin, which makes the F-22/F-35 advanced fighter jets, military helicopters and aircraft carriers, has attracted a lot of investor interest this year for potential gains from the Russian-Ukrainian war. However, there is great uncertainty about the extent of government military spending over the long term.
Lockheed Martin Corporation Q2 2022 Earnings Call Transcript
Lockheed Martin shares have what it takes to create strong shareholder value, but the high valuation can be a drag on price-conscious investors. Reflecting near-term risks, market watchers are cautious in their recommendations, although LMT looks set to hit a new high this year.
It makes sense to pause buy/sell decisions until a clear picture emerges of the company’s performance in the current quarter. Management warned that third-quarter performance would be negatively impacted if the US government did not finalize a crucial contract related to the supply of F-35 aircraft, for which it had signed an agreement in principle earlier. Recently, it received a multi-year, $2.3 billion contract to supply the Sikorsky Division’s UH-60 Black Hawk helicopters.
The company generates enough cash to finance the heavy investments needed to ramp up the business, which also strengthens its balance sheet. Management’s aggressive cost reduction efforts are expected to contribute to net income growth in the coming quarters.
Continuing the recent downward trend, all four operating segments posted negative growth in the second quarter, dropping total sales to $15.5 billion. As a result, earnings per share plunged 82% to $1.16 per share. Net income missed the market projection after beating in each of the past three quarters. Discouraged by dismal second-quarter results, the company has cut its guidance and currently predicts full-year earnings and revenue to be below last year’s levels.
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“The conflict in Ukraine was a dramatic reminder that we are in a global competition for power and we, at Lockheed Martin, stand ready to support our nation and its allies with advanced systems and technology. The United States alone has sent over 5,500 Javelin missiles to Ukraine in defense of their country. And this visit highlighted the continued need to focus on global security and deterrence capabilities,” said Lockheed Martin CEO James Taiclet.
After peaking in mid-April, the stock retreated over the following weeks and slipped below $400. The shares, which have gained 11% so far this year, traded slightly higher on Wednesday afternoon.