Lockheed Slumps on Dampened Growth Outlook But Dividend Remains Safe

Lockheed Martin slumped about 12% on Tuesday following disappointing guidance. Based on the forecast Lockheed provided in August, analysts had expected the defense giant's sales to grow roughly 3% next year.

Instead, the firm this week nudged its 2021 revenue guidance lower and now sees sales next year falling about 1.5%. Management then expects low single-digit revenue growth through 2026 as the business roughly tracks the pace of expansion in the U.S. military budget.

A handful of factors drove the disappointing outlook for 2021 and 2022. Most notably, pandemic-related supply chain delays worsened in August and September, reducing sales volumes across several production programs.

Lockheed's F-35 fighter jet program, which accounts for nearly 30% of revenue, will also see a slight dip in revenue next year. This reflects a revised production plan the Pentagon and Lockheed agreed to in September.
The plan is meant to ensure "predictability and stability in the production process while recovering the aircraft shortfall realized over the last year during the COVID-19 pandemic." 

The longer-term outlook for the F-35 remains unchanged for now (the program is expected to run through 2070), but annual production will fall a bit short of management's prior forecast for at least the next few years.

Besides these headwinds, the U.S. military's withdrawal from Afghanistan will reduce revenue next year since Lockheed had a special ops logistics program there.

Additionally, two successful helicopter and satellite programs are set to move down from their production peaks as part of their natural life cycle evolution.

The market was obviously disappointed by Lockheed's supply chain delays and muted growth prospects over the next year.

One frustrated analyst on the earnings call noted that the company's story feels like it has shifted from one focused on networking and linking every weapon on the battlefield to a "cash return story with no growth."

Defense budget uncertainty has also weighed on the industry's near-term outlook, with a rather wide range of outcomes discussed by policy makers over the past year.

“We remain surprised by how much the outlook for defense spending has changed over the past 11 months—from Progressive calls to cut defense by -10% to Biden's initial 1.6% [year over year] increase to FY22 legislation including ~5% increases. Also, keep in mind, this is being done with Democrats holding the White House and both chambers of Congress, and post-Afghanistan.”

– Cowen Analyst Roman Schweizer, per Defense One

Ultimately, the issues affecting Lockheed today seem unlikely to impact the firm's long-term outlook. Supply chains will eventually normalize, and defense budgets will always be cyclical and unpredictable.

Lockheed's A- credit rating and large backlog of contracted work position the firm to weather these cycles. The firm's diversified mix of programs and technologies also help insulate it from spending shifts as the rules of modern warfare evolve.

Coupled with Lockheed's excellent cash flow generation and moderate payout ratio, we remain comfortable with the firm's Very Safe Dividend Safety Score. In fact, the dividend was even raised by about 8% last month.
Lockheed recently upped its share repurchase authorization, too. The current authorization could buy back over 6% of Lockheed's outstanding shares at the current price, and management is eager to put this capital to work while sentiment is weak. 

"With our stock trading at the level well below what we calculate as the company's intrinsic value, we have significantly increased our planned share buybacks, and I anticipate that we will repurchase up to $6 billion of our shares over the next 12 to 18 months if conditions warrant."

– Chairman and CEO Jim Taiclet

Overall, Lockheed's performance has been disappointing over the last couple of years. We'd guess this mostly reflects concerns about peaking defense budgets and some of the setbacks with the firm's important F-35 program.

The stock may appeal to investors who can patiently wait for some of these near-term issues to be resolved over the next few years and believe in Lockheed's long-term durability.

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