Lockheed (LMT) Wins $279M FMS Contract for PAC-3 Missiles

Lockheed Martin Corp. LMT recently secured a $279-million modification contract for Patriot Advanced Capability-3 (PAC-3) missiles under the foreign military sales (FMS) program. Per the deal, the company will enhance the PAC-3 missiles production contract to include cost reduction initiative (CRI) missiles and associated ground support equipment. The deal will cater to Saudi Arabia.

Details of the Deal

The contract was awarded by the U.S. Army Contracting Command, Redstone Arsenal, Alabama. Operations related to the deal will be carried out in Grand Prairie and Lufkin, TX; Camden, AZ; Chelmsford, MA; Ocala, FL and Huntsville, AL.

Lockheed Martin will utilize other procurement (Army) funds in fiscal 2018 to complete the task. Work related to the deal is scheduled to be completed by Feb 28, 2023.

A Brief Note on PAC-3 Missile System

The PAC-3 is a long-range, air-defense and medium- to high-altitude guided missile system. It is designed to counter tactical ballistic missiles, cruise missiles and advanced aircraft. The system’s radar set provides tactical functions of airspace surveillance, target detection, identification, classification, tracking, missile guidance and engagement support.

The PAC-3 Missile is a high-velocity interceptor that defeats incoming targets by a direct, body-to-body impact. PAC-3 Missiles, when deployed in a Patriot battery, significantly increase the Patriot system’s firepower, since 16 PAC-3s load-out on a Patriot launcher compared with four Patriot PAC-2 missiles. The company anticipates demand for this advanced missile system to be high, particularly in politically tense regions of the Middle East.

What’s Favoring Lockheed Martin

Lockheed Martin’s PAC-3 team achieved several notable milestones in the fourth quarter of 2017. It was successful in neutralizing four tactical ballistic missile targets in a complex test in New Mexico that eventually led to the initiation of full-rate production for PAC-3 MSE interceptors.

Being Pentagon’s largest contractor, Lockheed Martin has been acquiring contracts from the Department of Defense, as well as from its international clients, for its PAC-3 missiles. In February 2018, the company won a $524 million contract for the production of PAC-3 enhancement missiles and it also clinched a $945 million deal for the same at the end of 2017.

Evidently, the company’s Missiles and Fire Control segment, which is the primary contractor for the PAC-3 defense missiles and interceptors, recorded fourth-quarter 2017 net sales of $2.3 billion, reflecting a solid 31% improvement from the year-ago quarter. We believe that such inflow of orders for its PAC-3 missiles will enable Lockheed Martin to garner similar top-line growth in the quarter ahead.

Moreover, in February 2018, President Trump proposed a fiscal 2019 defense budget that provides for an investment plan of $6 billion for varied missile programs. Lockheed Martin, being a premier missile developer, is expected to gain significantly from this provision.

Price Movement

Lockheed Martin’s stock has improved 24% in the last year compared with the broader industry’s gain of 44.6%. The underperformance may have been caused by the intense competition that the company faces in the aerospace-defense space for its broad portfolio of products and services, both domestically as well as internationally.

Zacks Rank & Key Picks    

Lockheed Martin currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same space are Boeing BA, Huntington Ingalls HII and Curtiss-Wright Corp. CW, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boeing recorded an average positive earnings surprise of 20.69% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings rose by $3.06 to $14.05 in the last 90 days.

Huntington Ingalls recorded an average positive earnings surprise of 3.85% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings rose by $5.44 to $17.38 in the last 90 days.

Curtiss-Wright Corporation recorded an average positive earnings surprise of 15.06% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings rose by 60 cents to $5.79 in the last 90 days.

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