Stock Is Shaky, but Lockheed’s Solid
To say things look bad for Lockheed Martin is an understatement. The stock has declined 20% in a week since management’s slashing of earnings estimates for the year 2000.
Lockheed Martin has lost $15 billion in market value in the last year, falling from $56.31 a share in November 1998 to a close of $17.38 on Friday.
The nation’s largest defense contractor, with $26 billion in annual revenues, now has a market value of only $7 billion. It is burdened by roughly $11 billion in debt--and last week suffered a downgrading of its credit rating by Moody’s, Standard & Poor’s and Duff & Phelps.
The company’s president and an executive vice president were ushered into early retirement a week ago, becoming the latest to depart in a year that has seen the replacement of Lockheed Martin’s entire management save for Chief Executive Vance Coffman.
And it looks as if Coffman’s days are numbered. A Lockheed Martin director is searching for a new president, who will undoubtedly replace Coffman as CEO after a suitable period to learn the ropes at the Bethesda, Md.-based company.
Dark clouds indeed for the defense giant that came together in 1995 and ’96 in the merger of Lockheed and Martin Marietta, and the later acquisition of the defense electronics business of Loral.
Yet this is the time to look beneath the surface and to look ahead, for Lockheed Martin is a storehouse of value that may fulfill its potential in the next few years as new management takes hold.
At today’s stock price, much of that value appears to be ignored. Consider, says defense consultant Loren Thompson of the Lexington Institute in Arlington, Va., “that Lockheed Martin’s systems integration business group, which is heavily in electronics, will earn more than $1 billion next year on $11 billion in sales.
“That division alone supports today’s stock price, and you get the rest of the company for free,” Thompson argues.
The “rest” of Lockheed Martin is four business groups with products ranging from fighter planes to satellites and rockets to the computer programs that run Social Security.
With an order backlog of $45 billion, mostly in government contracts, this is not a company that lacks for business.
It’s a company whose 165,000 employees “have a breadth of mastery over some of the most important military and space programs in this country. It’s a very solid company,” says John Harbison, defense expert at the Booz Allen Hamilton consulting firm.
It’s a company whose earnings--projected by management at $1 a share for next year--”are understated,” says analyst Joseph Campbell of the Lehman Bros. investment firm. Because Lockheed Martin has been put together by acquisitions of scores of small companies, it must now amortize large costs in excess of assets acquired--”goodwill” in accounting terms.
That means, Campbell explains, that there is larger annual cash flow than is readily apparent “and that can be used to pay down debt.”
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But if Lockheed Martin is so solid, why are earnings and credit ratings falling? Because of errors stemming from the inevitable confusion of trying to make a unified company from 40 or 50 divisions of several corporations.
Quality control slipped in the confusion, so there were embarrassing failures in launches of Titan and Athena rockets. Theater High-Altitude Area Defense missiles, meant to intercept other missiles, failed test after test. Lockheed Martin lost to Boeing in a competition for the National Reconnaissance Satellite program. Lockheed failed to offer an innovative proposal in a field it had dominated for decades.
Those setbacks were alarm bells. Managers of all of Lockheed Martin’s major programs have been replaced. And quality has begun to turn around. In the last two THAAD tests this summer, the missile hit the targets.
Lockheed today is facing reality, as will be evident in its coming decision to back away from a venture in telecommunications.
Lockheed Martin recently acquired 49% of Comsat, the commercial satellite company. Once Comsat was to be heart of Lockheed Martin Global Telecommunications, a new business group.
But Lockheed Martin was forced to change those ambitions as management confronted profit shortfalls and the need to repay debt. The most likely solution for the telecommunications group is that it will be sold or spun off to a joint venture with another company. Lockheed will gain funds to repay debt, explains analyst William Kidd of C.E. Unterberg, Towbin, a New York-based investment firm.
Lockheed Martin’s great advantage is that it’s a defense contractor, working under government contracts that won’t be allowed to fail. However, its disadvantage is that those contracts are based on politics.
Lockheed Martin, for example, produces the C-130J transport plane for the Air Force. But the Georgia delegation in Congress, not the Air Force, has always procured funding for the plane, which is manufactured in Marietta, Ga.
In recent years, however, the Georgia delegation has lost political clout because Sen. Sam Nunn and Rep. Newt Gingrich have retired. So the C-130J has run into funding problems. Ultimately the plane, which the Air Force needs, will be funded. But politics make it hard to plan and run a business.
The Pentagon now demands that defense contractors risk more of their own capital in programs. The aim is to hold down government costs and force contractors to be cost-conscious.
However, programs can spiral out of control for many reasons. Lockheed Martin’s F-22 air superiority fighter has already consumed $20 billion in development costs. Congress is balking at funding production of the aircraft, which could cost $100 million per plane--three times the original proposed cost in the 1980s.
Everyone is caught in a dilemma: If Congress delays funding or orders only a few F-22s, the per aircraft cost goes up. If it cancels the program, government and company will argue over huge losses. Politics will dictate some solution.
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But clearly what is needed for a big company in that kind of business is strong management to deal with the Pentagon while keeping program costs very much under control. Lockheed Martin may soon get that kind of manager, possibly an executive from tough and efficient General Electric. The Lockheed director searching for a new president is Eugene Murphy, executive vice president of GE.
Even with new management and a determination to improve, a more successful Lockheed Martin won’t arise overnight, cautions analyst Campbell. “But three years from now, this will be a much better company,” he says.
Beneath the surface, there’s a bedrock of solid business in Lockheed Martin.
James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
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Storehouse of Value
Lockheed Martin, despite Wall Street’s current low esteem, is a company with many profitable programs and an enormous backlog of orders. Statistics show sales, operating profit and backlog by business group.
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‘99 est. ’99 oper. sales profit est. Business group (billions) (millions) Systems Integration $10.7 $994 (electronics and information technology) Space Systems 6.2 372 (satellites, rockets, launch vehicles) Aeronautics 5.6 293 (F-16, F-22, C-130 planes) Technology Services 2.3 138 (information systems for federal programs) Corporate and other 1.0 --73 (investments and telecommunications) Total 25.8 1,724 Sources: Merrill Lynch, Lockheed Martin
Backlog Business group (billions) Systems Integration $15.1 (electronics and information technology) Space Systems 13.9 (satellites, rockets, launch vehicles) Aeronautics 8.6 (F-16, F-22, C-130 planes) Technology Services 4.6 (information systems for federal programs) Corporate and other 2.7 (investments and telecommunications) Total 44.9 Sources: Merrill Lynch, Lockheed Martin
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