Long-time Sarge fave Lockheed Martin (LMT) went to the tape with the firm's first quarter financial results on Tuesday morning, the first of the Aerospace & Defense Prime contractors to do so. Something that I, being long the shares, as well as having an elevated level of personal interest in the first place, look forward to every quarter. CEO Marillyn Hewson will leave that post this June to become the Executive Chair, and to be replaced as chief executive by James Taiclet at that time. So, how did the firm do, in its last full quarter reported with Hewson at the helm? Quiet well would be the straight up answer. The firm posted Q1 EPS of $6.08. That number was good enough for earnings growth of 13%, and decisively beat industry consensus. As for revenue, that line ended up at $15.65 billion, also a beat, and up 9.4% y/y. So, that's the good. We'll work our way through this to get to the bad, which was not that bad, and the "I don't know" that could be.
Generally good, across the board in my opinion, though with a few rough spots. The Aeronautics business, by far the firm's largest, managed to grow sales 14% to $6.369 billion. This is the unit that produces fighter aircraft, the F-35 in particular which much of the growth is attributable to. This business also manged to post increased operating profit on increased operating margin.
The second largest segment would be the Rotary and Mission Systems unit. This is where Sikorsky helicopters come from. The unit performed nearly flat from the same quarter last year, down just fractional in sales to $3.746 billion, as well as for operating profit and operating margin. Space, as a unit grew sales roughly 10% to $2.917 billion, though there was a reduction in operating profit as operating margin experienced a squeeze. Missiles and Fire Control saw an 11% increase in sales, but also reductions in operating profit as margin shrunk.
Just as an aside, the firm does feel that the Missile and Fire Control unit will be the firm's fastest grower over the next four years, not Aeronautics. In addition to that, for those looking for progress made in the arena of hypersonic weaponry, those products contributed to the performance of both the Space and Missiles units. In addition, the firm's effective tax rate increased to 15.4% for the quarter, up from 12.4% for Q1 2019.
Moving forward, Lockheed Martin maintained full year 2020 EPS guidance in a range of $23.65 to $23.95, which is below industry view, but did reduce guidance for revenue from operations slightly from $62.75 billion-$64.25 billion to $62.25 billion-$64 billion. In the related press release the firm stated: "The outbreak did not have a material impact on the corporation's operating results or business in the first quarter of 2020. However, the corporation is beginning to experience some issues in each of its business areas related to Covid-19, primarily in access to some locations and delays of supplier deliveries."
On the outlook, the firm goes on... "The corporation is updating its 2020 guidance for net sales to reflect these impacts, as production and supply chain activities have recently slowed in the Aeronautics business area."
I have been with Lockheed for so long that there is danger for me as an investor that maybe I don't see related risk clearly. That said, I think that there certainly are positives. The federal government is now firmly and deeply entrenched in the unwelcome economic world of greatly increased deficit spending. While the primary focus of all of this spending will have to be on defeating the virus, and supporting an economic rebuild, I do think that national defense remains a high priority as there are always adversaries and adversaries look for openings when one is down.
Of course, should supply lines move from "inconvenient" to "problematic" that would be a substantial risk to the form's ability to meet guidance. In addition, now that oil prices have completely collapsed, one has to wonder just what that means as far as the firm's foreign sales are concerned. Can those nations reliant upon energy production now afford to modernize national defense? Can those nations most crippled by the coronavirus? Time will tell.
What I Am Going To Do
I have a $442 price target on Lockheed Martin. That is not changing. I am going to sell 30% of my long position in LMT on this morning's pop. Why? Because those risks just made too much sense to me. Have to make sure I don't lose too much of what has been a spectacular winner to this point. Still love the name. Just being a trader.