Pentagon budget cuts have increasingly threatened the prospects of many defense-related companies. But aerospace giant Lockheed Martin (NYS: LMT) might be breathing a bit easier thanks to a new contract awarded by the Navy.
The devil is in the details
Lockheed secured a multiyear, $1.05 billion contract from the U.S. Navy to provide digital cockpits, sensors, and integrated mission systems for two Navy helicopters: the MH-60R Romeo and the MH-60S Sierra.
Both choppers are manufactured by Sikorsky Aircraft, a division of Lockheed peer United Technologies (NYS: UTX) , and have different applications. For instance, Romeo is used for warfare while Sierra is used for rescue and ship-to-ship cargo supply activities. However, Lockheed will provide the same digital cockpits for both choppers so that pilots of either will be able to use this technology without additional training.
Cost is the catch
Given the backdrop of a stringent military budget, this contract is definitely good news. What makes it attractive for the government is the cost-saving factor driven by the multiyear feature. As compared to annual contracts, this multiyear contract is expected to save the Navy nearly 10% in costs. This is far above the cost savings prediction of the Pentagon. Meanwhile, it gives Lockheed Martin a valuable backlog.
A stable relationship with the U.S. Army, Navy, and Air Force is essential for this defense contractor. After problems with the delay and rising costs involved with its F35 contract, the present deal should come as a relief for the company. Government contracts are the driving force behind Lockheed's profits, given the fact that it derived as much as 82% of its revenue from such orders in 2011. Add in the fact that the company also recently won a $715 million contract to build combat ships for the U.S. Navy, and things seem to be definitely heading in Lockheed's favor.
Given increasing military tensions with Iran, there is fresh demand for defense-related products in the Gulf countries, which is also good news for Lockheed Martin. Recently, the company signed a $3.6 billion contract with UAE, marking the first foreign sale of a THAAD (Terminal High Altitude Area Defense) system.
The Foolish bottom line
Lockheed Martin looks strong despite defense budget cuts. The ability of this company to face such challenges highlights a significant strength on its part. It is, however, very important to track all the moves of a company, to analyze it better. That's why my Foolish suggestion to you is to add Lockheed Martin to your free watchlist now. Click here.
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At the time thisarticle was published Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Lockheed Martin. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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