Lockheed Slumps on Prospect of No-Growth Sales, Margins

  • Third-quarter earnings of $2.77 a share exceeds estimates
  • Election in Canada may pose risk for the F-35, analyst says

Lockheed Martin Corp. fell after forecasting that sales and margins in 2016 will be little changed, surprising analysts who had predicted a revenue rebound after three straight annual declines at the world’s largest defense contractor.

Operating margins will range from 11 percent to 11.5 percent with sales comparable to 2015, Lockheed said Tuesday in offering its first assessment for next year. That “would be a contraction from the 12 percent we have forecasted for this year and compares to our 12.1 percent forecasts for next,” analyst Robert Stallard of RBC Capital Markets said in a note to clients.

Lockheed’s third-quarter profit release sets the stage for peers Boeing Co. and Raytheon Co., which report later this week. Earnings of $2.77 a share beat the $2.72 average of 17 analysts’ estimates compiled by Bloomberg. Revenue of $11.5 billion topped the $11.1 billion that analysts projected.

The outlook doesn’t include any impact from Chief Executive Officer Marillyn Hewson boldest strategic move, the $9 billion acquisition of United Technologies Corp.’s Sikorsky Aircraft announced in July that will make Lockheed the largest maker of both rotary and fixed-wing military aircraft.

Lockheed expects to complete the takeover this quarter, Hewson said during a conference call Tuesday. The company also plans to finish a strategic review this year of its planned divestiture of low-margin information-technology businesses that generate about $6 billion in annual sales. Options include a sale, spinoff or a tax-free transaction known as a Reverse Morris Trust, Hewson said.

F-35 Jets

Analysts projected 2016 sales of $45.5 billion, according to a revised average by Bloomberg, as Lockheed begins to speed output of the marquee F-35 fighter jet and wins more orders from abroad. Those gains will be tempered by declining sales in the company’s information technology and services division, Bruce Tanner, executive vice president and chief financial officer, told analysts.

Lockheed also updated its earnings outlook for 2015, saying it expected sales of $45 billion and earnings per share of $11.30, the upper range of a projection provided in July.

Consolidated operating margins were 11.8 percent in the third quarter, and 12.5 percent for the first nine months. The profit measure is expected to decline next year as Lockheed renegotiates contracts such as its C-130J military transport and F-35, Tanner said.

Lockheed fell 0.9 percent to $208.73 at the close in New York, trimming this year’s gain to 8.4 percent.

The first of several versions of the F-35, the Pentagon’s costliest weapons system, was declared ready for limited combat in July, five years later than originally predicted as Lockheed tackled problems ranging from the plane’s weight to its engines and software. Lockheed expects to deliver 45 of the jets in 2015, boosting annual output to about 150 by decade’s end.

Canada Election

RBC’S Stallard said the F-35 “appears to be at risk” in Canada after Justin Trudeau and the Liberal party ended a decade of Conservative rule on Monday. Trudeau last month vowed to scrap a planned purchase of 65 of the jets and hold a new competition for more affordable planes.

Faster output of Lockheed’s jet contributed $500 million in net sales to the aeronautics unit, and accounted for 20 percent of the company’s quarterly revenue. Operating profit for the unit grew 15 percent from a year earlier.

The defense contractor said that as of Sept. 27, it had $2.4 billion in potential cost and termination liability exposure related to upcoming C-130J transport and F-35 contracts. The company is negotiating final contract terms with the Pentagon and expects to receive additional funding by the end of 2015, although about $750 million could be delayed until next year.

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