Key takeaways:
· Orders remain robust with book-to-bill at 1.4x
· Only modest F-35 supply chain disruption risks from COVID-19, with growth expected in the double-digits this year
· Government support had a small impact on CF as the company accelerated its payments to suppliers
· Door open for M&A – Jim Taiclet has a track record of M&A at his prior position at American Towers:
o an interesting option if the defense budget declines with potential new president (which explains some of the recent decline in multiples from Biden advancing in polls – even though he has made no statement on his DoD budget intentions)
o Commercial aerospace is not of interest to him
· Committed to its dividend policy (HSD growth likely), while share repo halted until 2021 (mostly to offset dilution)
· 2020 guidance raised, now above January’s initial guidance:
o Sales guidance increased by +2%
o Segment EBIT, EPS and cash flow guidance increased by +5%
Current Price: $393 Price Target: $469
Position Size: 3.53% 1-year Performance: +1%
Lockheed released its 2Q20 earnings results yesterday, with organic sales +12% (7% above consensus) in a tough environment, segment operating margins +20bps, and EPS +7% ex-one time impairment charge on the sale of a JV. Lockheed continues to impress with its organic growth, one of the best in the industry, while maintaining good liquidity and balance sheet (net debt/EBITDA at 1.1x – giving it flexibility for M&A). Book-to-bill (a measure of future demand) is still positive at 1.4x. The sales growth this quarter came from the F-35 and missile platforms, both having reached some scale with maturing production programs, leading to higher margins.
While guidance was raised, the “bears” argue it implies a slowdown in 2H. We would counter argue that LMT has a tendency of providing conservative guidance, adding to the list COVID-19 uncertainties and a new CEO. Regarding increased costs related to the COVID-19, the company is in discussion with the Department of Defense over a settlement, although this could end up being negotiated on a smaller scale with individual customers.
Overall this was a good quarter from the company, which we view as core to our industrial sector exposure. We remain overweight this name in Focused Equity.
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
[category earnings] [tag LMT] $LMT.US
Committed to dividend, does not expect any changes to that priority. HSD increased in coming Qs
Repos has a place in capital allocation but pausing near term. Has done ~$1B
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109