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13 May 2015

Lockheed Martin – Teal Group Analysis

Phil Finnegan

Lockheed Martin – Teal Group Analysis

Strategy: Lockheed Martin is working to defend large fighter and transport aircraft programs such as the F-35 Joint Strike Fighter and the C-130 transport by performing well on its contracts while winning major new programs such as the next generation bomber (teamed with Boeing) and the Joint Light Tactical Vehicle.

Acquisitions will be small, niche acquisitions, particularly in information technology and systems integration while the company seeks to increase cash returned to shareholders through higher dividends and stock repurchases.

Created in July 1995 with the merger of Lockheed Martin (already a combination of Martin Marietta and Lockheed Corp.), its legacy dates back to the 1909 creation of a company by Glenn Martin that built aircraft for the U .S. military and commercial customers. Allan and Malcolm Loughhead began building aircraft in 1913, subsequently creating a corporation with the slightly altered name of Lockheed. In all, the modern Lockheed Martin brought together dozens of different companies to create what is now the world’s largest defense company.

Strengths: As the world’s largest defense company, Lockheed Martin has the size and breadth to be an extremely strong competitor. Its expertise in systems integration, space, information technology and aircraft also give it considerable potential in bringing together the systems of systems capabilities to which major U.S. prime contractors now aspire. Lockheed Martin has a strong reputation for technological expertise. The company also has tremendous strength as the U.S. government’s largest information technology provider. Lockheed Martin has an unrivaled position in combat aircraft, giving the potential to dominate future fighter production worldwide. As the prime contractor for the F-16 fighter, the F-22 fighter and the F-35 Joint Strike Fighter Lockheed Martin has the premier portfolio of fighter programs.

Weaknesses: Lockheed Martin is heavily reliant on US government sales, which will be under pressure in coming years due to the US fiscal deficit. Moreover, it is reliant on large, high value programs such as the F-35 Joint Strike Fighter, which will be a tempting target for budget cutters. Like other space companies, Lockheed Martin’s commercial launch and satellite operations are suffering, but its military space business has also been hit by pressure on complex, costly programs.

Opportunities: If Lockheed Martin can aggressively reduce the cost of the F-35 Joint Strike Fighter, it could have a product that would dominate world fighter markets. International sales are growing, reaching 20% of sales in 2014, up from 14% in 2009. The company does have strong demand overseas for products in aeronautics and missile defense. It sees the potential to in- crease international sales to 25% of its total revenues within the next several years. Lockheed Martin is well positioned in the federal information technology sector, which should benefit from a number of trends including the war on terror, greater outsourcing, and a demographic shift in the federal workforce.

The company also has been very successful in using that information technology strength and systems integration strength to win a growing list of competitions in network centric warfare. It also has been successful in teaming with other companies in new markets for the company such as helicopters and shipbuilding to broaden its business base by offering its own systems integration expertise.

Threats: Like other defense companies, Lockheed Martin faces a tougher US procurement environment that promises to hurt profit margins in coming years. In particular, efforts to shift more risk to contractors could hurt, particularly in the F-35 program.

Should the F-35 Joint Strike Fighter not meet weight, performance and cost goals, this could pose a serious problem for the corporation by under- mining US and international support for the program. Competition in the defense market is intense. Services are eager to re-compete programs to cut costs. Raytheon is investing heavily in research and development. That effort appears to have paid off with Raytheon's victory last year on the Aegis Air Missile Defense Radar, an upset that displaced Lockheed Martin's longstanding compete dominance on the Aegis program.

In space, Lockheed Martin faces new competition in space launch from SpaceX, which is offering launches at a fraction of the price Lockheed Martin's United Launch Alliance joint venture with Boeing offers.

About the Author

Philip Finnegan

Philip Finnegan

Phil is Director of Corporate Analysis at Teal Group. He has provided strategic and market analysis for clients in commercial aerospace and defense, including major U.S. and European prime contractors, since joining Teal fifteen years ago.

He also writes and edits Teal's Defense and Aerospace Companies Briefing, which analyzes the performance, outlook and strategies of 50 aerospace and defense companies in the United States, Europe, Asia and South America. He is a co-author of the annual World Unmanned Aerial Vehicle Systems with responsibility for UAV companies.

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