Investing View: Why Small Contracts Can Lead to Big Profits During Turbulent Times

By , Money Morning •

There's an old adage in business that big contracts command big headlines.

But bigger isn't always better.

All too often, companies that focus only on big contracts discover there are very lean stretches between contract awards. And that affects the predictability of their earnings.

That's why here at Money Morning we're more interested incompanies that can secure a lot of smaller contracts on a consistent basis - and that can transform those deals into predictable, double-digit growth.

We refer to these modest-contract specialists as the "Masters of the Small Bid."

Let me explain...

As we've stated, the companies we're targeting aren't characterized by headline-grabbing mega-contract wins, but by their proven ability to land smaller, more-stable deals. You see, by spreading their risk across many smaller deals rather than just swinging from the heels every time, the companies we follow are able to generate a consistent stream of earnings - despite a slowing economy, a wrenching credit-crisis and damaged investor confidence.

In short, our "masters" have kept themselves in front of paying customers at a time when other firms are simply worried about having customers.

Let's look at several strong examples.

A Sample of Strong-Bid Masters

It's no coincidence that our first example - defense-contractor and aerospace expert Lockheed Martin Corp. (LMT) - has been around for decades, and is a proven survivor. Remembered as the designer of the P-38 Lightning fighter of World War II fame - an aircraft so deadly that Nazi leaders ruefully dubbed the twin-boomed airplane "The Fork-Tailed Devil" - Lockheed Corp. went on to build the graceful Lockheed Constellation airliner in the 1950s and the cutting-edge F-117A Nighthawk Stealth Fighter in the 1980s.

A disastrous foray into commercial jetliners - in which only 250 airplanes were sold, even though the program lasted from 1968 until 1984 - would have likely bankrupted many companies. But Lockheed's been a survivor. Indeed, back in the 1990s, to keep pace with a wave of defense-sector consolidations that created a smaller group of bigger players, Lockheed linked up with Martin Marietta Corp. to form Lockheed Martin.

Lockheed Martin re-established its fame with the so-called "Skunk Works" advanced-technology unit, and even today remains a defense-sector heavyweight. But it's also a Master of the Small Bid. For proof, just look at some recent deals.

Lockheed roared into April, landing a $50 million contract for the U.S. Navy on April 1, and a $234 million Air Force contract on April 2. A week later, the company landed a deal a day for four straight days, in the process rolling up $725 million in total business from the U.S. Army, the Turkish military, and Japan's Mitsubishi Heavy Industries Ltd.

The rest of the month saw still more action as the Navy signed on Lockheed for a one-year, $15.5-million contract for continued program management and engineering services for the United Kingdom's Trident II D5 Fleet Ballistic Missile (FBM) program. The company closed the month in a decisive manner with two more major deals on April 30. The National Aeronautics and Space Administration (NASA) signed a $39.5 million contract modification with Lockheed Martin Space Systems to implement an employee-retention program, while the Navy supplied a contract boost worth up to $190 million to supply tooling and special test equipment for its new F-35 Joint Strike Fighter.

Not a bad month's work. And it's certainly representative of how Lockheed generates a predictable earnings stream. Because of deals such as these, the company's share price rose nearly 8% in the month of April alone. In May we've been seeing even more deals, and the stock is advancing again.

Clearly, small deals can have a big impact on a company's bottom line.

The Gamer That Doesn't Play Games

At a time when other gamers are worrying about the next best thing, Japan-based Konami Corp. (ADR: KNM) retooled one of their most successful releases, Metal Gear Solid, adapted it for mobile phones, and then built up a lot of buzz as they pushed it out to customers of the Verizon Wireless unit of Verizon Communications Inc. (VZ).

Not only did Konami save a lot of money because it wasn't developing a new platform from scratch, it also kept its audience smaller to produce bigger returns per person.

While the pumped-up adolescent males soak up this stealth shooter game, Konami hasn't forgotten to take care of the over-moneyed and under-served teenage-girl market with its recent new game, "Diary Girl." The Nintendo Co. Ltd. (OTC ADR: NTDOY) Nintendo DS game provides girls of all ages the ability to interact with friends, while also organizing a calendar and address book in their own, password-protected electronic journal.

A month ago, Konami announced an agreement with Win Systems International Holdings Inc., to use Konami content in certain of Win's pending lottery and gaming projects in Europe and Latin America.

Deals like this have caused Konami's shares to seek higher ground. With a 19% gain over the past three months, the only thing that could help this company even more is if it had a highly awaited Sony Corp. (ADR: SNE) PlayStation 3 game coming in the near future - which just happens to be the case. Metal Gear Solid 4, the highly awaited PlayStation 3 game, will debut June 12.

The Other Kind of Gamer

MGM Mirage (MGM) is another great example of a company that is constantly finding ways to expand its customer base. When people consider MGM, they often think of the downtown Las Vegas strip, slot machines, neon signs and dealers waiting to take your money. MGM Mirage does very well in its dealings in Las Vegas and other casino resorts across the nation, but recently, MGM has made some moves that will give the company a new image, and help them to recognize profits in sectors that are so far untapped.

For instance, the company took steps to create non-gaming resorts so that consumers who want all the entertainment and the luxury of the MGM Mirage resort - but don't want the gambling scene - could still be served. In other words, MGM Chief Executive Officer J. Terrence Lanni has realized that the MGM brand conveys an image and a value that transcends nickel slots, poker chips and a scotch on the rocks to take the edge off.
      
As Money Morning reported last year, most of these non-gambling facilities are being set up overseas, with a focus on markets in China. So not only does this provide classy places for wealthy Chinese consumers (and visiting business executives) to party, relax or even catch 40 winks, it also enables MGM to profit from China's torrid growth. Increasingly, China's emerging middle class is becoming very brand-conscious, and that holds true for their growing tourism forays: Consumers want the opportunity to stay in name-brand hotels and resorts. And MGM wants to make that happen; the result is that the company is going to dazzle them - with real neon lights.

The bottom line: MGM has become a high-profit play on China. And many other markets, too. It's not just a gaming company anymore.

Mastering Bite-Sized Bids

Some companies aren't mastering "small bids;" they're mastering microscopic ones.

Global titan Yum! Brands Inc. (YUM) knows the importance of ultra-frequent, ultra-miniature deals. While the companies mentioned above are seeking out million-dollar contracts, Yum's Taco Bell subsidiary is discovering ways to make hundreds of thousands of people say, "I'll take the burrito supreme" - every day.

Yum's latest focus? China, of course! The company is seeing a rising share of its profits coming from overseas in general, but the People's Republic of China is developing into a frontrunner for sales growth. This comes as no surprise to us here at Money Morning. With all of the money flowing in, through and all around China lately and the looming Beijing Summer Olympics attracting attention from all corners of the globe, companies that depend upon disposable income are storming through the markets.

With full knowledge of this, Yum! has been adjusting to capture many more miniature bids. In 2007, Yum's operating profit in China increased 30%.With only the KFC franchise alone they are expecting to have 3,000 stores in China by the end of the year.

Another company that is turning these micro-bids into huge profits is PepsiCo Inc. (PEP), - also a great example of a company that is recognizing its global potential. PepsiCo's first-quarter profits were up 5% due to international growth, which left the company with a hefty net income of $1.15 billion.

In a quarter that was riddled with rough days in the U.S. economy, PepsiCo managed its way around the U.S. consumer malaise by capitalizing on overseas growth. Sales volumes were particularly strong in China, South Africa, the Middle East and India, while the Americas fared rather poorly, volumes falling slightly.

Companies like PepsiCo know where to focus their marketing when the time is right. Having a global presence during a downturn in its native U.S. market is an example of shrewd diversification.

And that makes PepsiCo - you guessed it - another Master of the Small Bid.

History shows that companies in this category generate consistent returns no matter how tough the markets get. And by moving forward at all times, these firms are positioned to really outperform their peers when the economy returns to normal.

And return to normal it will - when everyone least expects it.

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