Stock of the week - Lockheed Martin (14.04.2022)

• Lockheed Martin is one of top US military contractors

• Stock trades over 30% year-to-date higher

• Russia-Ukraine war encourages countries to boost military spending

• Company set to report Q1 2022 earnings on Tuesday, April 19

Wall Street earnings season began this week. So far, investors were offered reports from US banks and other financial institutions but things are about to get more interesting after Easter break. Pipeline of earnings releases will get more diverse next week and investors will be offered financial reports from one of the top US defense contractors - Lockheed Martin. Let's take a closer look at the company that began to draw renewed attention after the launch of the Russian invasion of Ukraine.

Lockheed Martin is one of top US military contractors

Lockheed Martin, US aerospace and defense company, is one of top US military contractors. Company is a well-known manufacturer of jet fighters used by the US army as well as militaries of allied countries. Company is also involved in other business, like production of satellite communications and space launch vehicles or development of data analytics and electronic warfare. All of those are heavily employed in the modern military and it should not come as a surprise that Lockheed Martin is one of top 10 military contractors for the US government.

Impact of Russia-Ukraine war on defense spending

Launch of the Russian invasion of Ukraine, unsurprisingly, provided a boost for shares of defense companies, including Lockheed Martin. Military budget of the US Department of Defense was expected to be lower slightly with smaller fund allocation to fighter jets. However, as the global order has changed and risk of Russia-NATO confrontation increased, it is highly likely that no such decrease in funding will be made. Even if it is made, Russia's hostility is likely to keep orders from US allies flowing, making it almost sure that Lockheed Martin will not have to lower its production rates.

While war in Ukraine is a tragedy and a senseless loss of life, it is also a kind of an opportunity for Western defense companies. As the flow of NATO weapons to Ukraine is only expected to intensify going further, this is an opportunity for arms manufacturers to have their products tested in a real combat environment and depending on how those products cope, it may have a big impact on future orders. However, this may not be the case for Lockheed. As Lockheed Martin is involved in the manufacturing process of highly advanced weaponry, its products may not be used extensively in Ukraine due to the lengthy training process involved.

Q1 earnings release on Tuesday, April 19

Lockheed Martin is expected to report earnings for the first quarter of 2022 before opening of the session on Tuesday, April 19. Financial data for the first quarter is unlikely to capture the full, if any, impact of the Russia-Ukraine war but some updated guidance may be offered for the full-year. Company's current guidance for 2022 called for $66 billion in full-year sales and earnings per share of $26.70. This would mean a 1.5% drop in sales and a 17.3% jump in EPS. It would be highly surprising to see a major defense contract see its sales drop in a year when Russia's incursion into Ukraine put whole NATO on high alert and encouraged politicians to boost defense spending.

When it comes to data for the first quarter of 2022, the market expects Lockheed to report a 4.3% YoY drop in sales, to $15.55 billion, and a 5.3% YoY drop in EPS, to $6.23. Operating income is expected to be lower at $2.03 billion (-8.5% YoY). An 8.1% YoY drop in net income to $1.68 billion is also expected.

Taking a look at Lockheed Martin chart (LMT.US) we can see that the upcoming earnings release may be a "make-or-break" moment for the stock. Shares broke above the upper limit of post-pandemic trading range in late-February and reached textbook range of the breakout ($473) in early-March, following Russia invasion of Ukraine. Stock has struggled with delivering a break above the $473 area since and earnings release next week could be a catalyst for a bigger move. Source: xStation5