Lockheed Martin Stock Price Is Not Hurt by Declining Jet Sales

The Lockheed Martin stock price remained unmoved in morning trading today (Tuesday) on the release of Lockheed Martin earnings.

Lockheed Martin stock priceLockheed Martin Corp. (NYSE: LMT) earnings revealed that the world's largest defense company fell short of Wall Street's revenue estimates. The defense giant posted a $10.1 billion sales figure. Analysts forecasted a $10.3 billion clip. This was a 5.1% drop from last year's first-quarter numbers.

Lockheed Martin did post earnings per share (EPS) of $2.74. That was above estimates of $2.50. But it was also a 4.5% decline from last year's EPS.

The Lockheed Martin stock price fell slightly - as much as 0.8% by 10:45 a.m. EDT. Fortunately, it was not enough to suggest that investors panicked and prompted a massive sell-off.

And that's encouraging. A big contributor to the Lockheed Martin earnings miss on revenue came from a 7.4% decline in its aeronautics segment. If investors are ever hesitant to buy Lockheed Martin stock, it would come from negative developments on this front.

Lockheed Martin derived 32.7% of its $45.6 billion in 2014 revenue from military aircraft. At about $14.9 billion in sales for 2014, Lockheed Martin is the No.1 fighter jet vendor in the world. It's just ahead of Boeing Co. (NYSE: BA), whose military aircraft sales totaled $13.5 billion in 2014.

So it's understandable that any bad news in aeronautics could impact the Lockheed Martin stock price.

But price movements have been rather muted this morning. If there is a sharper sell-off later in the day, it shouldn't sour you on Lockheed Martin.

Here's the real story behind Lockheed Martin earnings and the falling jet sales...

Lockheed Martin Stock Price Undeterred from Jet Sales

Let's take a closer look at those sales declines.

Net sales fell for the C-5 and C-130. These are two aircrafts that are decades old - the C-5's first flight was in 1968, the C-130's was in 1954. They are inevitably going to be wound down. And, what's more, they don't hold the keys to Lockheed's future anyway. These declines accounted for lower net sales of $230 million.

Net sales tied to the F-22 were down $50 million. They were also down another $70 million for the F-16.

Once again, neither figure is too discouraging. The F-22 Raptor program was cancelled by Congress in 2009. It's only true value right now is the revenue Lockheed will generate sustaining the 187 aircraft that were delivered. The F-22 did prove to be a major blunder by the Pentagon and became a money pit. But those failures are a distant memory. They have long since been factored into the Lockheed Martin stock price. Declining revenue on these jets is almost irrelevant at this point.

And the declining revenue for the F-16 shines the light on the true Lockheed Martin stock price driver for decades to come...

The True Value Behind the Lockheed Martin Stock Price

F-16 revenue is going to fall. But that's because it's being cannibalized by a much larger, blockbuster program for which Lockheed Martin is the steward: the F-35.

The F-35 program represents the largest contract in procurement history. The U.S. government plans to buy 2,400 of these multi-role combat fighters. Foreign governments will add another 600 orders.

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The program is projected to cost $400 billion to purchase the crafts. Another trillion will finance maintenance and upgrades over the program's lifetime. And this is a stream of revenue that will feed into Lockheed Martin earnings - and by extension, stock price - over the 56-year life cycle of the program.

In short, Lockheed Martin is the lead contractor for a program expected to return an average of $25 billion a year over its lifetime.

Lockheed Martin earnings reported $175 million in net sales for F-35 production contracts on increased volume and sustainment activities. Lockheed Martin also reported that "F-35 development contracts were comparable."

When the F-35 goes operational in 2018, it will capture 50% of the jet fighter market globally, according to Teal Group analyst Richard Aboulafia, as reported by National Defense in September 2014.

This program will virtually force all other players out of the global combat aircraft market and leave only Lockheed Martin. It's a massive program.

So any decline in Lockheed Martin jet sales now is simply a precursor to the hundreds of billions of dollars in future revenue that will come from the F-35.

It's extremely unlikely the F-35 will be a flop like previous aircraft programs, given that there's nothing to compare the ambitiousness of the F-35 to in the history of combat aircraft. But even without this share-price driver, Lockheed Martin stock is still an intriguing buy.

LMT is not just a jet vendor, even though it's first in military aircraft. It's the largest defense company in the world by revenue. It's No. 1 in the industry in space and missile systems at $15.8 billion for 2014, ahead of Raytheon Co. (NYSE: RTN), according to Bloomberg. It's also the top defense vendor for electronics and missile systems, generating $7.2 billion in 2014. And it generates $7.8 billion in information systems, trailing only General Dynamics Corp. (NYSE: GD).

The Bottom Line: Lockheed Martin earnings were less than stellar. But peeling back the numbers just reiterates the long-term case for the company. The Lockheed Martin stock price will be largely driven by the F-35, but not only driven by it. It's the top defense company in a lot of important areas. And it provides a healthy dividend yield of 3.05%.

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