Key takeaways:
Yesterday LMT released strong 2Q18 earnings with sales +6.6%, operating margin +20bps, and EPS +31.5%. The sales beat came from more wins and faster conversion rate of orders into revenue. It is important to note that this is not a pull forward of orders from 2H into 1H, but rather driven by better business fundamentals. We are maintaining our favorable view on the stock.
Important points following the conference call were:
· LMT’s prior 2018 guidance was increased:
o The sales forecast raised by 2.5%: this is pretty significant compared to prior raises, and is broad based across the portfolio, thanks to strong new wins. Some orders came ahead of planning thanks to earlier than planned Department of Defense awards. The management team sees this strong growth as sustainable beyond 2019.
o EBIT margin forecast increased by 5%. Profitability should further improve as the F-35 ramps up (see margin progression in chart below). The production of the F-35 is expected to double from 2017-2019, and represents close to 30% of sales (of which 30% comes from foreign demand).
o EPS forecast raised by 6%, primarily due to better operational performance, and secondly due to more favorable tax rate.
o Cash from operations increased to $3.3B from $3B.
· The management team hinted at revenue toward the high end of its 3-5% growth target beyond 2018 (more to come in October during 3Q18 earnings).
· Free cash flow was negative this quarter, as another $2B were allocated to its pension plan ($1.5B additional will be added in Q3). As a reminder this is related to the tax law changes. 4Q18 will show significant FCF improvement.
LMT Thesis:
· Lockheed Martin is a primary beneficiary from the replacement cycle for aging military aircraft and ships
· Excellent management team focused on returning capital to shareholders
· Strong cash flow and financial position
[tag LMT] $LMT.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109
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