Key takeaways:
Current Price: $288 Price Target: $388
Position Size: 3.47% 1-year Performance: -17%
Lockheed’s 4Q18 earnings results were good enough with sales 5% above consensus, while EPS missing by a penny. What was really positive this quarter was the leading indicator for future demand known as book-to-bill ratio reaching 1.46x, and backlog hitting $130B (+19% sequentially). Margins increased 60bps in the quarter. Production improvements with the F-35 will help its margin by 50bps, as they are hitting a more mature cadence. F-35 is on track so far for 2019: deliveries should reach 131 in 2019 (+40 vs 2018) and keep growing until it reaches 160 in 2021. There were some cash collection delayed to 2019, providing a $250M boost to 2019 cash flows. On the cash flow front, the company transferred some pension liability to Prudential, thus mitigating volatility on $2.5B of pension obligations. This covers 41,000 current retirees (25% of their retired pension population). We remain positive on the company’s outlook where fundamentals are resilient and the end markets are supported in part by the US Defense budget growth.
Segments review:
Missiles & Fire Control: sales +22% y/y primarily driven by higher volumes on classified and precision fires programs
Rotary & Mission Systems: sales down 4% y/y due to lower Black Hawk helicopter sales
Aeronautics: sales +4% y/y due to higher F-35 and F-16 production
Space Systems: sales +2% y/y due to higher Orion program volume, fleet ballistic missiles and government satellites services
2019 Guidance in line with consensus:
Sales up 5% at the mid-point
Segment operating margin 10.8%
FCF guidance is now at least $7.4B (vs. $7B previously)
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