On Thursday, the media got word from the U.S. Air Force of successful testing of Lockheed Martin’s (LMT) new and improved long range missiles. The successful testing, in which 15 out of 16 missiles got the desired result, should clear the way for up to $4.4 billion in contracts through 2023 after a Pentagon review of the program in December. Back in June, an Air Force spokesman said that the program faced possible termination if these tests were unsatisfactory. The previous three tests were far less successful with just six out of ten missiles detonating on impact or hitting the desired target. Improvements to manufacturing processes and quality of inputs were likely the key to the new found success.
“Lockheed has contracts so far to build 1,053 Joint Air-to- Surface-Standoff Missiles and has received about $600 million. The company would receive about $4.4 billion more from building the remaining 3,847 the service plans to buy.
These contracts would be separate from foreign sales. Australia wants to buy an extended-range version of the missile.
Bethesda, Maryland-based Lockheed beat Chicago-based Boeing Co. in April 1998 in a competition for the program.”– Bloomberg.com 11/5/2009
It was just more than a week ago that we reiterated on this blog that we believe that Lockheed Martin still represented a good value buy in response to disparaging comments from television pundit Jim Cramer (Cramer Changes Tune on Lockheed Martin). Cramer was making the case for Northrop Grumman (NOC) saying that NOC’s products rather than LMT’s were more closely aligned with the Pentagon’s new strategies under the Obama Administration. While he may be correct, we argued that Lockheed Martin’s management will not be left unaware of the shifting priorities and will find ways to continue to compete for new projects. Essentially, it is as an old friend would often say, “management will manage.”
The stock is trading 3% higher on the day as the test results may provide steady long term revenue. In this case, the contract has not been awarded yet, but these improvements to their long range precision missile products will likely open doors to new business not only in America but in other countries as well. We continue to believe in the direction of this defense contractor as their stock has continued to improve fundamentally, and we are reaffirming our Undervalued stance on LMT shares. Lockheed has been around for a long time and has dealt with shifting defense priorities for a long time. We continue to believe that Cramer overreacted to his understanding of the Pentagon’s goals, and he was too quick to write off LMT from fitting into them.