Inside Lockheed Martin’s Risk Factors After FTC Lawsuit

Maryland-based Lockheed Martin (LMT) is a global security and aerospace company whose customers include the Pentagon. 

The company’s revenue rose to $17.7 billion in Q4 2021 from $17 billion in the same quarter the previous year and met the consensus estimate. It posted EPS of $7.47, which increased from $6.38 in the previous year’s quarter and beat the consensus estimate of $7.15. 

The company distributed $762 million in dividends during the quarter and $2.9 billion for the whole year. Lockheed ranks among the top dividend stocks with a yield of 3.48% compared to the sector average of 0.69%. 

In a bid to expand its business, Lockheed agreed to acquire rocket engines provider Aerojet Rocketdyne. But the Federal Trade Commission (FTC) has sued to block the transaction over concerns that it would reduce competition in a critical area of national security. Lockheed will review the lawsuit to decide whether to defend the deal or terminate it.

With this in mind, we used TipRanks to take a look at the newly added risk factors for Lockheed.

Risk Factors

According to the new TipRanks Risk Factors tool, Lockheed Martin’s main risk category is Production, representing 21% of the total 24 risks identified for the stock. Tech and Innovation and Legal and Regulatory are the next two major risk categories, each with 17% of the total risks. Lockheed recently updated its profile with two new risk factors.

The company informs investors that a large portion of its revenue is tied to the F-35 program. For example, the program represented 27% of Lockheed’s revenue in 2021. The company explains that the program is huge and complex, and it anticipates that the program will be subject to continual reviews. It cautions that spending cuts on this program or delays in orders would adversely affect its business. Lockheed further mentions that the COVID-19 pandemic could also bring supply challenges that could adversely impact its operations related to the F-35 program.

Beginning in 2022, companies will no longer have the ability to deduct R&D expenditures immediately. Instead, they are required to spread out the deductions over five years. The consequences are that it could result in increased tax expenses and reduced cash flows for companies. Lockheed cautions that if Congress does not change the provision, it could take a $500 million hit on its cash from operations in 2022. Another issue of concern that Lockheed wants investors to keep in mind is that there is a proposal to raise the U.S. corporate income tax rate, which could adversely impact its profitability. Furthermore, the company says that it regularly undergoes tax audits around the world and that such audits could result in unexpected liabilities.

In an updated risk factor previously highlighted by the company, Lockheed cautions that failure to complete the Aerojet Rocketdyne acquisition could adversely impact its prospects. The company says that it will decide within 30 days whether to challenge the FTC in court or terminate the merger agreement. 

The Production risk factor’s sector average is 15%, compared to Lockheed’s 21%. Lockheed shares have gained about 23% over the past 12 months.

Analysts’ Take

Following Lockheed Martin’s Q4 earnings report, Susquehanna analyst Charles Minervino reiterated a Buy rating on Lockheed stock and raised the price target to $445 from $400. Minervino’s new price target suggests 13.74% upside potential.

The analyst noted that Lockheed delivered solid quarterly results and enters 2022 with the U.S. defense spending outlook looking better. Although there may be near-term headwinds, Minervino thinks the long-term growth prospects are promising and that Lockheed should continue its attractive capital return policy.

Consensus among analysts is a Moderate Buy based on 4 Buys and 7 Holds. The average Lockheed Martin price target of $406.91 implies 4.01% upside potential to current levels.

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