(LMT) Lockheed Martin Corporation Earnings Scorecard

Lockheed Martin Corporation (LMT), the defense industry goliath, exited fiscal 2011 on a mixed note. Lockheed Martin reported strong bottom line beating past the market apprehension but missed the top line. The company posted fourth-quarter 2011 operating earnings of $2.53 per share, beating the Zacks Consensus Estimate of $1.94 and the year-ago quarterly earnings of $2.28.

Lockheed Martin also affirmed its fiscal 2012 earnings to be in the range of $7.70 – $7.90, on revenues in the range of $45 billion to $46 billion. The market reaction was mostly positive as judged from the response of analysts covering Lockheed Martin.

Highlights from the Quarter

Lockheed Martin on the revenue front reported quarterly net sales of $12.2 billion, falling short of the Zacks Consensus Estimate of $12.3 billion by $91 million. Also the company came short of the year-ago quarterly revenue of $12.8 billion by $550 million.

The downside in sales came from all the segments barring a stagnant Aeronautics segment. In the quarter, Electronic Systems’ sales decreased 8%; Space Systems’ sales decreased 7%; and Information Systems & Global Solutions’ sales decreased by 3%.

Earnings from continuing operations for the fourth quarter of 2011 were $698 million versus $821 million a year ago. Lockheed’s reported quarterly earnings were affected by a pension expense adjustment, a drop in research and development tax credits, premiums on the early extinguishment of debt and expenses related to a facility consolidation. Overall, Lockheed Martin’s quarterly net earnings fell to $683 million from $961 million in the year-ago period.

Agreement – Estimate Revisions

Estimates for Lockheed Martin saw no activity over the past week with no movement in either direction for both the first quarter and fiscal 2012. Over the past month, estimates have tilted towards the positive side with 12 (out of 17 analysts) having raised their forecasts for fiscal 2012 coupled with 2 downward revisions. Lockheed Martin’s better-than-expected results and its status as the largest U.S. defense contractor seem to be the driving factor for the positive estimate revisions.

However, for the first quarter, estimates manifest no bias with 4 (out of 19 analysts) upward and negative revisions each over the past month. Such a mixed sentiment clearly depicts the analysts’ worry about a shrinking order backlog base.

Magnitude – Consensus Estimate Trend

Lockheed Martin’s fourth-quarter, bottom-line beat, however, failed to allay market trepidations about potential cutbacks for its large programs like the C-130J and Joint Strike Fighter. Any future concerns about the U.S. federal deficit may have an adverse affect on defense spending, especially on Lockheed Martin’s high-cost platform programs. Also, Lockheed carries a sizeable pension liability. The company’s operating earnings and future cash flows can be affected by higher pension costs in lower interest rate environments. This has influenced estimate revisions for the near term. Looking at estimate revisions for the ongoing quarter, the consensus has inched up by a penny each over the past week and the past month. Currently, the quarterly Zacks Estimate stands at $1.69.

However, strong earnings in the fourth quarter stemmed the tide for the current quarterly estimate. The major beneficiary has been the fiscal 2012 Zacks Consensus Estimate which climbed from $7.79 to $7.86 over the last 30 days. The long-term bullishness stands from market expectations riding on Lockheed programs like the THAAD, Pac-3, and F-35 to name a few.

Price Stats

Since its last earnings release on January 26, 2012, Lockheed Martin’s market price increased 6.3% to $87.64 as of February 8, 2012. During trading hours on February 8, the stock reached the day low of $86.14 and the day high of $87.71. The stock price attained the 52-week high of $87.71 on February 8, 2012. In contrast is the 52-week low of $66.36 in the first half of August 2011.

Reiterate Neutral

We currently remain on the sidelines on Lockheed Martin due to U.S. economic fundamentals being kept on a leash as the Euro-crisis continues. This keeps the risk high for further cutbacks in defense budgets. However, we believe market pessimism is fully accounted for in the current valuation of the defense behemoth, which is priced at a discount to both industry peers and the overall market. Over the longer run, we expect the company to register a stable performance thanks to a leveraged presence in the Army, Air Force, Navy and IT programs. Also, shareholder return will continue to be shored up by the company’s focus on debt repayment, its ongoing share repurchase program and the incremental dividend.

However we believe all the above-mentioned positives have already been taken into account in the current share price. This justifies the Zacks #3 Rank, which translates into a short-term “Hold” recommendation.

Considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock. This is in sync with its peers like The Boeing Company (BA) and Northrop Grumman Corporation (NOC).

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/.

BOEING CO (BA): Free Stock Analysis Report

LOCKHEED MARTIN (LMT): Free Stock Analysis Report

NORTHROP GRUMMN (NOC): Free Stock Analysis Report

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