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It's earnings season on Wall Street, and this week the focus turns to defense contractors. Over the next few days, at least a half-dozen of America's biggest defense companies will report their Q1 2016 numbers, and leading the pack will be Lockheed Martin , the nation's biggest pure-play defense contractor -- which reports tomorrow.
Here's what we know now, before the news comes out.
What analysts say
- Buy, sell, or waffle?:According to data from S&P Global Market Intelligence, 20 separate analysts have Lockheedon their radar. Ten rate it a buy, eight say hold, and two, sell.
- Revenue:On average, they're looking for quarterly sales to grow 12% to about $11.4 billion.
- Earnings:Profits, however, are expected to fall 5% to $2.59 per share.
What management saysLooking further out, Lockheed management's most recent guidance is for full-year performance to be both worse and better than what analysts are predicting for Q1. With a full year of Sikorsky revenueunder its belt, Lockheed believes it can collect about $50.25 billion in revenue this year, which would equate to 9% sales growth -- slower than is expected for Q1 alone. Profits-wise, on the other hand, management believes it can earn roughly $11.60 per share, which would work out to 1% revenue growth.
What management does How does a company grow sales 9% but profits nine times slower? That's all a function of how profitable those sales are. It's a function of profit margins. And here's how Lockheed Martin's profit margins have been trending lately.
Data source: S&P Global Market Intelligence.
What to watch tomorrowAnd so you see, while the margin erosion has not been huge, profit margins at Lockheed Martin are trending downward. That's a trend that could gain speed as the year progresses and Sikorsky's operations have a larger and larger effect on Lockheed's overall operations.
As you probably recall, Lockheed Martin agreed to buy Sikorsky from United Technologies for $9 billion in July of last year -- but the sale only closed in November. Now, Sikorsky never generated much profit for United Technologies -- that's one big reason United Technologies sold it! Sikorsky hasn't yet had much time to affect Lockheed's overall profit margins, but it will. One crucial thing we'll want to look at tomorrow, therefore, is how big an effect Sikorsky's first full quarter as part of Lockheed Martin has on the company's overall profitability.
Longer term, Lockheed Martin now has more than four months' experience working with Sikorsky, and should by now be getting a handle on how well the new unit is integrating -- and whether over time, Lockheed will be able to start extracting "Lockheed-size" profit margins from its new Sikorsky revenue stream. That could have an effect on full-year guidance, shifting it either up... or down.
And finally, let's not forget the elephant in the room: Lockheed Martin's F-35 stealth fighter jet. Much of Lockheed's future success -- not just for the quarter, or the year, but for decades to come -- is built upon the success of its F-35 program. Ultimately, this program could come to account for half the revenueLockheed Martin books in a year. But for those revenues to be profitable, Lockheed Martin needs to ramp up F-35 production, spread out development costs across a lot of planes, and get the per-plane price down to encourage new buyers.
Simply put, Lockheed needs to be building as many F-35s as possible, and as fast as possible. Tomorrow, we'll get our next look at how well that's going.
The article 3 Numbers to Watch When Lockheed Martin Reports Tomorrow originally appeared on Fool.com.
Rich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 315 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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