Lockheed Drops Most in Nine Months as Sales Outlook Disappoints

Updated on
  • Third-quarter revenue misses estimates by most in a decade
  • Contractor raises three-year cash forecast to $16.2 billion

Lockheed Martin Corp. dropped the most in nine months after its first hint at a 2018 outlook suggested that the company won’t reap rewards from a record $104 billion order backlog just yet.

Sales will increase about 2 percent next year as a new rule is adopted that changes the timing of when revenue is booked, the world’s largest defense company said in a statement Tuesday. That fell short of the 2.8 percent average of analysts’ estimates compiled by Bloomberg.

The longer term picture, which includes higher cash generation than the company had previously forecast over the next three years, had some analysts urging patience to jittery investors.

Quarterly earnings results that came in below expectations added to the sluggish near-term growth to disappoint investors, who had lofty expectations for a stock trading near historic highs. The shares declined 2.5 percent to $312.60 at 2:40 p.m. in New York, after earlier dropping as much as 3.2 percent, the biggest intraday decline since Jan. 24.

Shareholders are focused on sales growth and cash flow as barometers of the company’s ability to wring greater rewards from the F-35 fighter jet, the Pentagon’s most expensive weapons system, and other defense products, said Douglas Rothacker, an aerospace and defense analyst with Bloomberg Intelligence. Analysts expect Lockheed’s earnings per share to climb almost 50 percent by 2020 as F-35 deliveries rise.

While the F-35 program’s operating margin is poised to exceed 10 percent next year, Lockheed will still need to counter dwindling profit from its F-16 fighter and C-5 cargo aircraft, Bruce Tanner, Lockheed’s chief financial officer said during a conference call with analysts. Recent contract wins like an F-16 sale to Bahrain and missile defense sale to Saudi Arabia won’t be felt until the end of the decade.

Encouraging Signs

“Although a headline EPS miss for a highly valued company like Lockheed Martin is normally bad news, especially when it has come from a shortfall on revenues, we think investors should not get carried away,” Robert Stallard, an analyst with Vertical Research Partners, said in a note to clients Tuesday. “Operating guidance for the full year has actually ticked a bit higher, and the increase in the three-year cash guide is also encouraging.”

As the first major U.S. defense company to report earnings, Lockheed sets the tone for competitors such as Boeing Co., General Dynamics Corp. and Northrop Grumman Corp., which are due to unveil results Wednesday. Lockheed provided the first glimpse of the impact of a new accounting standard requiring companies to book revenue as costs are incurred, rather than when products are delivered to the Pentagon.

The earnings release provided fodder for both bullish and bearish investors. Lockheed’s quarterly profit missed estimates for the second-time this year, while its 2017 forecast surprised analysts -- hinting at a stronger close to the year.

Accounting Impact

The new accounting practice will clip net sales about 2 percent next year, compared to what they would have been under the old standard, the company said. The contractor doesn’t expect the change to affect its 2018 cash from operations, which it predicts will be $5 billion or more even after a $1.6 billion pension contribution. The company is typically conservative with its preliminary outlook for the year ahead.

Third quarter earnings slid to $3.24 a share, trailing the $3.26 average of analysts’ estimates compiled by Bloomberg. Revenue of $12.2 billion fell well short of the $12.8 billion expected by analysts, the largest sales miss in at least a decade, according to data compiled by Bloomberg.

Both measures dipped from a year ago, when Lockheed booked one-time gains from an investment in AWE, a partnership providing warheads for the U.K.’s Trident nuclear defense system. Tanner, the finance chief, attributed the sales miss to a “timing-related shortfall” that “will be more than made up for during the fourth quarter.”

Lockheed expects a strong close to the year as it boosted its forecast for this year’s earnings by 55 cents a share to a range of $12.85 to $13.15. Analysts had expected profit of $12.63 a share. In slides posted to its website, Lockheed also boosted its three-year cash forecast to $16.2 billion, up from an earlier prediction of $15 billion.

F-35 Fortunes

The contractor’s fortunes largely rest on the F-35, the first fighter designed to meet the vastly different missions of the U.S. Air Force, Marines and Navy -- a program with a $406.5 billion price tag.

After development issues ranging from software glitches to engine fires, the stealthy jet is moving closer to full production. Flight testing is 98 percent completed, Chief Executive Officer Marillyn Hewson said during the earnings call. “We remain on track to complete all of the system development and demonstration flight testing in the next few months.”

Lockheed plans to deliver 66 of the aircraft this year, rising to about 80 planes next year, by Rothacker’s estimate, and then to 160 jets a year a decade from now.

As tensions rise from Europe to Asia, Lockheed is also seeing renewed interested in its sophisticated Terminal High Altitude Area Defense against short- and medium-range ballistic missiles. South Korea is deploying the system, known as THAAD, and Saudi Arabia recently received approval to buy the weapons system valued at as much as $15 billion.

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