Lockheed's sales outlook disappoints

Lockheed Martin Corp.’s first sales forecast for 2018 fell short of analysts' estimates as the company prepared to implement a new accounting standard that changes how revenue is recognized from contracts.

Sales will increase about 2 percent next year, the world's largest defense company said in a statement Tuesday. That fell just short of the 2.8 percent average of analysts' estimates compiled by Bloomberg.

Investors are focused on sales growth and cash flow as barometers of the company's ability to wring greater rewards from the F-35, the Pentagon's most expensive weapons system, said Douglas Rothacker, aerospace and defense analyst with Bloomberg Intelligence. Analysts expect Lockheed's per-share earnings to climb nearly 50 percent by 2020 as F-35 deliveries rise.

“Analysts will want to understand more about the moving parts and accounting change for 2018,” Rothacker said in an interview. He expected analysts to focus on how the new rule will affect long-term profit during an earnings conference call hosted by the Bethesda, Maryland-based company Tuesday.

The shares declined 1.7 percent to $315.40 at 9:32 a.m. in New York after sliding as much as 2.3 percent for the biggest intraday decline in six months. Lockheed had jumped 28 percent this year through Monday, eclipsing the 15 percent average gain for members of the S&P 500 Index.

As the first major U.S. defense company to report earnings, Lockheed sets the tone for competitors such as Boeing Co., General Dynamics Corp. and Northrop Grumman Corp., which are due to unveil results Wednesday. Lockheed provided the first glimpse of the impact of a new accounting standard requiring companies to book revenue as costs are incurred, rather than when products are delivered to the Pentagon.

Earnings Miss

The earnings release provided fodder for both bullish and bearish investors. Lockheed's quarterly profit missed estimates for the second time this year, while its 2017 forecast surprised analysts – hinting at a strong close to the year.

Net sales will be clipped by about 2 percent next year as Lockheed adopts the new accounting practice, the company said. The contractor doesn't expect the change to affect its 2018 cash from operations, which it predicts will be $5 billion or more. The company is typically conservative with its preliminary outlook for the year ahead.

In the third quarter, Lockheed's earnings slid to $3.24 a share, trailing the $3.26 average of analysts' estimates compiled by Bloomberg. Revenue of $12.2 billion fell well short of the $12.8 billion expected by analysts, the largest sales miss in at least a decade, according to data compiled by Bloomberg.

Both measures dipped from a year ago, when Lockheed booked one-time gains from an investment in AWE, a partnership providing warheads for the U.K.’s Trident nuclear defense system.

Lockheed also hinted at a strong close to the year as it boosted its forecast for this year's earnings by 55 cents a share to a range of $12.85 to $13.15. Analysts had expected profit of $12.63 a share. In slides posted to its website, Lockheed also boosted its three-year cash forecast to $16.2 billion, up from an earlier prediction of $15 billion.

F-35 Fortunes

The contractor's fortunes largely rest on the F-35, the first fighter designed to meet the vastly different missions of the U.S. Air Force, Marines and Navy – a program with a $406.5 billion price tag.

After development issues ranging from software glitches to engine fires, the stealthy jet is moving closer to full production. Lockheed plans to deliver 66 of the aircraft this year, rising to about 80 planes next year, by Rothacker's estimate, and then to 160 jets a year a decade from now.

As tensions rise from Europe to Asia, Lockheed is also seeing renewed interested in its sophisticated Terminal High Altitude Area Defense against short- and medium-range ballistic missiles. South Korea is deploying the system, known as THAAD, and Saudi Arabia recently received approval to buy the weapons system valued at as much as $15 billion.

“Although a headline EPS miss for a highly valued company like Lockheed Martin is normally bad news, especially when it has come from a shortfall on revenues, we think investors should not get carried away,” Robert Stallard, an analyst with Vertical Research Partners, said in a note to clients Tuesday. “Operating guidance for the full year has actually ticked a bit higher, and the increase in the three year cash guide is also encouraging.”

This story was originally published October 24, 2017 at 12:01 PM with the headline "Lockheed's sales outlook disappoints."