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Lockheed surges on bullish sales 2017 forecast following IT deal

🕐 3 min read

Lockheed Martin soared the most in seven years after predicting robust sales growth next year, as Chief Executive Officer Marillyn Hewson streamlines the company to focus on planes, helicopters and missiles.

The world’s largest defense contractor also surprised analysts with a forecast for stronger 2016 results following the $4.6 billion spinoff of an information technology unit in August. Profit is expected to be about $12.10 a share, compared with a July forecast ranging from $11.15 to $11.45 a share, the Bethesda, Maryland-based company said in a statement Tuesday. Sales will expand about 7 percent next year, Lockheed said.

“Their outlook for 7 percent revenue growth next year is pretty impressive,” Douglas Rothacker, an aerospace and defense analyst at Bloomberg Intelligence, said by phone. “Granted, not many have given 2017 outlooks yet, but I think you’d be hard-pressed to find a defense contractor generating growth like that.”

The stock rose 5.6 percent to $245.17 at 11:07 a.m. in New York after surging as much as 5.9 percent, the biggest intraday increase since April 2009.

Hewson bolstered Lockheed’s holdings over the past year by buying United Technologies Corp.’s Sikorsky helicopter division and increasing a stake in the U.K.’s nuclear deterrent program by 18 percent. The results set the stage for Lockheed peers General Dynamics Corp., Boeing Co., Northrop Grumman Corp. and Raytheon Co., which are scheduled to report earnings later this week.

While the new Lockheed is coming into sharper focus, there are still several key unknown elements that may shape year-end totals, starting with continuing negotiations for the largest low-rate initial production F-35 contracts.

If talks wrap up this year as Pentagon officials have suggested, Lockheed’s cash from operations for the year would be greater than $5.7 billion, the company said. If collection slips into 2017, the total would be about $700 million less. Production has continued on the contracts initially authorized in 2014 and 2015. The company said it has about $950 million of cash exposure and $2.3 billion in termination liability exposure.

Quarterly projections were “muddied by a range of methodologies” that analysts used to model results amid several moving parts, said Jason Gursky, a senior analyst at Citigroup. The largest and most complex: the impact of the $4.6 billion spinoff of Lockheed’s IT division to Leidos Holdings through a tax-free transaction, he said in an Oct. 9 report.

Accounting rules require Lockheed to update its full-year guidance as if the technology and services business had been “gone all year, partially offset by the share retirement” from the transaction, Gursky wrote. Company executives had suggested that they would lower the 2016 forecast since the former business contributed about $1 a share to earnings.

Adjusted third-quarter earnings rose to $3.61 a share, handily exceeding the $2.89-a-share average of analysts’ estimates compiled by Bloomberg. Sales reached $11.6 billion, while analysts expected $11.5 billion.

The results reflected a 34 cent non-cash gain as Lockheed increased its ownership stake in AWE Management Ltd. to 51 percent, and about a 19 cent benefit for a lower-than-anticipated income tax rate, Douglas Harned, a defense analyst at Sanford C Bernstein & Co., said in a report to clients.

Sales this year are projected to increase to $46.5 billion, up from an earlier prediction of $46 billion to $46.2 billion.

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