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Lockheed: A Lean, Mean Fighting Machine It Ain't

News: Analysis & Commentary: MANAGING

Lockheed: A Lean, Mean Fighting Machine It Ain't

Is the world's biggest defense contractor, too big?

The snafus keep on coming at Lockheed Martin Corp., and Wall Street keeps on selling. A missile-defense program flops in trials. Delays plague satellite launches. A new cargo plane flunks de-icing tests. Then, a bombshell hits: For the second time in five weeks, the company downgrades earnings forecasts for both 1998 and 1999 because it can't get the goods to customers on time.

What does Lockheed Martin think it is--Boeing Co.? The same type of surprises that have been depressing the aircraft maker's share price--production glitches, slipping delivery schedules, and expensive charges against earnings--are showing up on Lockheed Martin's radar. And like Boeing's, Lockheed's stock price has been pummeled in recent months, and is now hovering near its 52-week low of $82, well below its $118 high of last spring.

It wasn't always this way. The $27 billion Bethesda (Md.)-based company became the world's No. 1 defense contractor by leading the post-cold-war consolidation, becoming a favorite among analysts and at the Pentagon. Recent setbacks have those cheerleaders asking some tough questions. "Has this company just gotten too big and too complex?" asks Merrill Lynch & Co. aerospace analyst Byron K. Callan. Says a top Defense Dept. official: "You can't have 50 priorities--the product suffers."

Lockheed Martin President and Chief Operating Officer Peter B. Teets acknowledges that he and Chairman and CEO Vance D. Coffman face a challenge in managing a company with Lockheed Martin's girth. "Is it easy to manage?" Teets asks. "I'd have to say no." But he insists that size can be a plus--when, for instance, divisions within the company team up to bid for contracts. "There is huge strength in this diversity," Teets says. "My biggest challenge is to learn how to harness that strength."

He'd better learn fast, because the behemoth may still be growing. After Lockheed Martin was forced to drop an $11.6 billion bid for Northrop Grumman last July in the face of government objections, in September it turned around to offer $2.7 billion for Comsat Corp. And British defense company General Electric PLC says it is talking to Lockheed Martin, among others, about a combination. Teets won't comment, but says the company is "an interested observer" of transatlantic deals.

Further dealmaking doesn't necessarily sit well with analysts who are now pressing Lockheed Martin management to cope better with what they already own. Admittedly, a GEC deal would give the company entree to Fortress Europe, Cai Von Rumohr of SG Cowen says. But it also gives management "one more body to regulate."

According to First Call Corp., the consensus of analysts' 1998 projections for the defense titan has shrunk to $6.22 a share from $6.65. For 1999, analysts have pared their estimates from $7.32 to $6.81, and several are downgrading the stock.LOSING ALLIES. Another strike against the company is the loss of its congressional champion, outgoing House Speaker Newt Gingrich (R-Ga.). He helped keep the C-130 cargo plane in production--it's built in Marietta, Ga., near his district. Without him, the Pentagon won't speed up orders for the new C-130J. That would cause the cost to Lockheed per plane to rise. As an offset, the company is threatening to tack some of the C-130J overhead onto the price tag for the new F-22. Needless to say, the Pentagon is balking. "We don't just eat it," says Jacques S. Gansler, the Pentagon's acquisitions chief.

The company's defense side has other problems as well. A missile-defense program to protect troops in the field--a Pentagon priority--has failed five times to intercept a target. And even Boeing bested Lockheed Martin on several defense contracts, including a national missile-defense program. "We are worried" when a supplier as important as Lockheed Martin loses a string of competitions, says Deputy Defense Secretary John J. Hamre.

On the commercial side, satellite-related delays led to a 3% decline in nine-month sales and a 13% drop in profits for the $7.5 billion Space & Strategic Missiles Sector. And some customers may walk.

For all its problems, Lockheed Martin has its strengths. It's a major player in new technology the Pentagon is eyeing. And it could show its muscle as it competes for the Joint Strike Fighter and other new weapons. But Wall Street is skeptical. "Maybe hope springs eternal," says Merrill Lynch's Callan. "In this case it's hope with a small h."By Stan Crock in WashingtonReturn to top

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