Lockheed (LMT) Wins $77M Deal To Support AEGIS Modernization

Defense major, Lockheed Martin Corp.’s (NYSE:LMT) business segment, Rotary and Mission Systems, recently clinched a modification contract to supply fiscal 2017 AEGIS modernization production requirements. Work related to this deal is scheduled to be over by Dec 2020.

Details of the Deal

The contract, worth $76.6 million, was awarded by the Naval Sea Systems Command, Washington, D.C. Moreover, the value of the deal can increase up to $192.3 million, if the options included in the modification are exercised.

The company will utilize fiscal 2017 defense-wide procurement; 2015, 2016 and 2017 other procurement, 2012 shipbuilding and conversion, and foreign military sales funding to complete the work. Majority of the modification work will be carried out in Moorestown, NJ. The remaining tasks will be executed in Clearwater, FL and Owego, NY.

What’s AEGIS?

AEGIS or Advanced Electronic Guidance and Instrumentation System is an integrated missile-guidance system. With Lockheed Martin as its primary manufacturer, the AEGIS Weapons system is used by the U.S. Navy and allied ships to protect the battle group.

Another company working on AEGIS is Raytheon Company (NYSE:RTN) . At the heart of the system is the AN/SPY-1, an advanced, automatic detect and track, multi-function phased-array radar. Raytheon is the manufacturer of this high-powered radar transmitter that tracks and guides missile functions.

Over time, AEGIS has become an integral part of the U.S. Navy by evolving with new capabilities to counter emerging threats and leverage new technologies. Its latest configuration, Baseline 9, offers an open architecture framework to allow extreme flexibility.

Our View

Lockheed Martin's Rotary and Mission Systems business carries out some of the company's high-profile programs. These include the Aegis Combat System, Littoral Combat Ship, MH-60 helicopter avionics, along with military and commercial orders. It generated revenues of $3.4 billion in the second quarter of 2017, reflecting almost 27% of its total revenue.

Coming to order growth for this segment, the Sikorsky business line of the segment secured a $3.8 billion worth five-year contract for supplying 257 Black Hawk helicopters to the U.S. Army, as well as to the Saudi Arabian National Guard, in the second quarter.

Currently, Lockheed Martin's Aegis is the maritime weapon system of choice for six powerful nations. As of Jan 2017, 84 U.S. Navy ships were in service with the AEGIS Weapons System installed. This number will definitely rise given the strong demand for AEGIS prevalent across the globe. Considering this, we expect Lockheed Martin to bag more contracts like the latest one, in days ahead, which, in turn, will boost its profitability.

Price Movement

Lockheed Martin’s stock has returned 14% in the last one year, underperforming the 28.7% rally of the industry it belongs to. This could have been caused by the company’s F-35 program, which, despite being a prime project of the U.S. government, has been repeatedly criticised for being overtly expensive. Moreover, Lockheed Martin faces stiff competition from other defense majors like The Boeing Company (NYSE:BA) and Northrop Grumman Corp. (NYSE:NOC) .

Zacks Rank

Lockheed Martin currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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