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Earnings Preview: Defense Giant LMT Reports Q4 Results on Monday

January 26, 2018
Fighter jets flying in the sky

Defense company Lockheed Martin (LMT) reports fourth-quarter earnings and closes out fiscal 2017 before market open on Monday, Jan. 29.

In the third quarter, LMT reported adjusted earnings per share (EPS) of $3.24, down from $3.61 in the prior-year quarter excluding discontinued operations, on revenue of $12.17 billion. On the top-line, LMT missed analyst estimates by a wide margin, while earnings were pretty much in line with estimates.

For its fourth-quarter results, LMT is expected to report adjusted EPS of $4.06, up from $3.25 compared to Q4 2016, and revenue is projected to increase 7.27% year over year to $14.75 billion, according to third-party consensus analyst estimates. LMT has beat or met earnings expectations in seven out of the last eight quarters, while top-line results have been a little more inconsistent.

LMT has been in the process of ramping up its F-35 program and recently announced it had delivered 66 of the aircraft in 2017, more than a 40% increase compared to 2016. Management said it plans to continue to ramp up production each year to eventually hit a full rate of approximately 160 F-35 planes in 2023. CFRA analysts have said they view the F-35 program as the company’s most critical due to the fact that it comprises around 15% of its sales.

The cost of the F-35 program has been a topic that has come up more than a few times from different government officials, including President Trump. The U.S. government’s total acquisition costs for the F-35 are projected to be $406.5 billion and an additional $1.1 trillion in long-term operations and support costs through 2070, according to the Pentagon. Earlier in December, the Pentagon’s newly appointed acquisition head, Ellen Lord, laid out several plans before the Senate Armed Service Committee to bring down costs related to the F-35.

Last quarter’s earnings call was dominated by talk of the F-35 program and, with the renewed government focus, it could be one of the main topics among both management and analysts again.

As has been the case on many earnings calls so far this quarter, management might also provide some additional commentary regarding the impact of tax reform. So far, LMT has only said “we are exploring numerous options to utilize the benefits from tax reform in ways that will support the growth of our company and deliver value to our employees and shareholder. We expect to implement those options early in 2018.”

Lockheed Martin Corporation stock chart leading up to its Q4 earnings report


Lockheed Martin (LMT) was up 26.74% in 2017 and outperformed the S&P 500 (SPX). Heading into earnings, the stock isn’t too far off the all-time high of $336.67 that it hit on Jan. 16. The bottom chart shows implied volatility. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Lockheed Martin Options Trading Activity

Options traders have priced in about a 2.7% potential stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility is about as high as it gets and was at the 99th percentile as of this morning.

There isn’t a whole lot of options activity in LMT. In short-term trading at the Feb. 2 weekly expiration, there’s been a smattering of trades across a range of strikes for both calls and puts. The same is true for recent trading at the Feb. 16 monthly expiration; there’s been a little activity at the 330 and 335-strike calls and the 330-strike puts, but other than that there really hasn’t been much.

Looking Ahead

Earnings season kicks into high gear the last week in January with reports due out from some of the biggest companies across sectors. McDonald’s (MCD), Pfizer (PFE), Eli Lilly (LLY), Merck (MRK) and Boeing (BA) are on the docket, as well as some of the largest names in tech. Microsoft (MSFT), Facebook (FB), Amazon (AMZN), Apple (AAPL) and Alphabet (GOOGL) are just a few of the tech companies scheduled. There were some big stock moves in the third quarter during the week when all these companies reported.

It’s also a busy week outside of earnings: Conference Boards’ consumer confidence comes out Tuesday morning and President Trump delivers his first state of the union address later that night, and January unemployment and non-farm payrolls are set to be released Friday morning. The Fed also kicks off its first meeting of 2018. For a look at what else is happening in the markets, check out today’s Market Update.

Good Trading,

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