October 26, 2007



|Lockheed Martin Corp. |(LMT-NYSE) |$336.49* |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Update

Prev. Ed.: Apr 18, 2018: Non-Earnings Update

Brokers’ Recommendations: Positive: 64.3 %( 9 firms); Neutral: 35.7% (5 firms); Negative: 0.0% (0) Prev. Ed.: 9; 5; 0

Brokers’ Target Price: $381.46 (( $5.9 from the last edition; 13 firms) Brokers’ Avg. Expected Return: 13.4%

Note: A flash update was done on Apr 26, 2018 (1Q18 Earnings Update).

*Note: Though dated May 3, 2018, share price and broker material are as of Apr 24, 2018.

Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table and PMES section. The extra figures in the Valuation table and PMES section come from reports that did not have accompanying spreadsheet models.

Portfolio Manager Executive Summary

Lockheed Martin Corporation (LMT) is the largest U.S. defense contractor. The company designs, manufactures and integrates advanced technology systems, products and services. It maintains expertise in aeronautics and aircraft manufacturing as well as electronic, space and IT systems.

Of the 14 brokerage firms in the Zacks Digest group covering the company, nine were positive and five were neutral while none gave a negative rating on the stock. The average Zacks Digest target price is $381.46 (( $5.9 from the previous report and approximately (13.4% from the current price). Price targets range from $316.00 (approximately ( 6.1% from the current price) to $410.00 (approximately ( 21.9% from the current price).

Buy or equivalent outlook (64.3%; 9/14 firms): Per most of the bullish firms, Lockheed Martin’s first-quarter earnings exceeded both the top line and bottom-line estimates. The sales upside was primarily driven by solid performance in Aeronautics and Rotary & Mission Systems segments. On the other hand, lower tax rate resulting from the recent tax reform drove the earnings upside. Meanwhile, the company’s F-35 program continues to ramp up in manufacturing, with higher volumes helping to improve the profitability of the planes.

Lockheed Martin has a solid portfolio of products that has been gaining traction, especially internationally. The firms believe that the company is well-positioned to benefit as global defense spending grows over the next several years. Also, global concerns will support international purchasing by U.S. allies, in their opinion. Overall, the firms believe that the increased production of F-35, along with a broad portfolio of products including missiles and radar systems, will drive the performance of the company.

Neutral or equivalent outlook (35.7%; 5/14 firms): For the neutral firms, Lockheed Martin delivered better-than-expected first-quarter earnings on the back of strong sales performance and lower-than-expected tax rate. On the flip side, the neutral firms expressed dissatisfaction over the company’s Space Systems segment’s performance, which reflected weaker year-over-year operating margins that also came in below the firms’ expectations. They attributed lower volume for government satellite programs as the primary reason behind this segment’s poor performance.

May 1, 2018

Overview

The firms have identified the following factors for evaluating the investment merits of Lockheed Martin:

|Key Positive Arguments |Key Negative Arguments |

|Compelling Fundamentals: The company is the U.S. government's largest defense|Changes in the DoD Budget: With majority of its revenue stemming from |

|contractor, a leading supplier of space launch vehicles, satellites and |prime contracts and subcontracts, for which the federal government is the |

|ground services, and a prime contractor for the F-35 aircraft. |end customer, the company could be adversely affected by changes in the |

|Missile Demand: Among the four operating units, the MFC segment posted the |level and composition of defense spending. |

|highest growth. The company noted strong, sustainable demand across its |Focus on Problem Programs: Lockheed’s high-dollar platform programs (the |

|missile portfolio (Trident, Patriot, THAAD, JASSM, Hellfire). |JSF, F/A-22, missile defense) are all potential targets for spending cuts |

|Sound Management: Lockheed focuses on shareholder wealth creation along with |by the government. Further problems with these programs could reduce |

|a cash deployment strategy that emphasizes share repurchases and small niche |investor confidence and the premium valuation that the company currently |

|acquisitions in private transactions. |enjoys. |

|Competitive Advantage: Intense competition exists in the industry, but the |Execution Risk: Failure to meet milestones on different programs during a |

|company is well positioned to compete for government satellites, launch |highly challenging production ramp could lead to execution risk. |

|systems, and strategic and defensive missile systems programs. |Pension Risk: The company maintains a sizeable pension liability. Its |

|International Sales: The company also caters to foreign governments. Growth |operating earnings can be affected by higher pension costs in lower |

|in international sales will offset some of the sequestration headwinds. |interest rate environments. |

|completed the divestment of its IS&GS division and owing to this deal, it has| |

|realized a net gain of $1.2 billion. | |

| | |

Based in Bethesda, MD, Lockheed Martin Corporation (LMT) is a diversified defense company that primarily researches, designs, develops, manufactures, integrates, operates and sustains technology systems and products, apart from providing a range of management, engineering, technical, scientific, logistic and information services. The company also serves customers in domestic and international defense and civil markets, with its principal customers being agencies of the U.S. government.

The company currently operates through the following four businesses: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) (previously known as Mission Systems and Training (MST)) and Space Systems.

The Aeronautics segment is engaged in the design, research and development, systems integration, production and support of advanced military aircraft and related technologies. This segment is involved with major programs comprising F-35 Lightning II Joint Strike Fighter; C-130 Hercules; F-16 Fighting Falcon; F-22 Raptor; and C-5M Super Galaxy.

The MFC business segment operates some high-profile programs including the Terminal High Altitude Area Defense System, Joint Light Tactical Vehicle, PAC-3 Missiles, as well as logistics and other technical services from GTL.

The RMS business segment operates a variety of military and commercial helicopters, ship and submarine mission and combat systems; mission systems and sensors for rotary and fixed-wing aircraft; sea and land-based missile defense systems; radar systems; the Littoral Combat Ship (LCS); simulation and training services; and unmanned systems and technologies. Some of its major programs include Black Hawk and Seahawk helicopters, Aegis Combat System (Aegis), LCS, CH-53K development helicopter, VH-92A helicopter program, Advanced Hawkeye Radar System, and The Command, Control, Battle Management and Communications (C2BMC) contract.

The Space Systems is engaged in the design, development, engineering and production of satellites, strategic and defensive missile systems and space transportation systems.

Lockheed Martin Corporation’s fiscal year coincides with the calendar year. Further information on the company is available at its website: .

May 1, 2018

Long-Term Growth

As a leading global defense contractor, Lockheed competes with other large prime contractors, such as, Northrop Grumman Corporation (NOC), The Boeing Company (BA), Raytheon Company (RTN) and General Dynamics Corp. (GD). The firms believe that the industry is highly competitive and is subject to fluctuations in defense spending and national security priorities. In addition to the traditional military business, defense contractors are likely to benefit from the expansion of homeland security initiatives, including bio-detection, explosive detection, and first-responder communications, and intelligence and surveillance systems.

Expansion of international revenues remains a key component of the company’s corporate strategy. The company expects to increase its international revenue share to around 25% in the coming years. Despite government restraints, increasing demand from Asia and the Middle Eastern countries will help the company in fulfilling its international sales target.

Joint Strike Fighter (JSF) is a critical and a long-term commitment for the company. It has also been a headline risk for the company. The firms expect JSF to likely be threatened over its lifetime by continued budget pressure. The firms are of the opinion that the risk to program cuts is high and that higher production rates could get delayed. The company however seems confident of selling the F-35 fighter jets to foreign clients, which to some extent, would compensate for lower defense spending at home. With the Blueprint for Affordability agreement signed with the DoD, the company expects to reduce the price of F-35, and thus fuel its demand. Moreover, technological improvement of the C-5M and C-130 models will help raise their demand in domestic and international markets.

Going forward, management also intends to explore the strong business opportunities outside the traditional defense-focused arena, specifically in the areas of civil, government, and the commercial space business. With the proposed FY19 defense budget emphasizing on increased spending for missile defense, space systems, cyber security, ISR, advanced sensors, communications and munitions, the company’s focus on strengthening its non-core defense segments will serve it well over the long term.

Feb 8, 2018

Target Price Valuation

|Rating Distribution |

|Positive |64.3% ( |

|Neutral |35.7% ( |

|Negative |00.0% |

|Avg. Target Price |$381.46 ( |

|Highest Target Price |$410.00 ( |

|Lowest Target Price |$316.0 |

|Analysts with Target Price/Total |13/14 |

Risks that may impede the achievement of target price include defense sector underperformance, cuts or delays in the F-35 program, headline risk on major programs, and the Sikorsky acquisition. Other risks include failed program capture, program execution difficulties, increasing DoD contract scrutiny, and rising U.S. and foreign budget deficits.

Recent Events

On Apr 30, 2018, Lockheed Martin announced that elected officials and business community leaders have joined the company in the formal opening of a new manufacturing facility. This will create more than 80 new jobs by mid-2019. These new jobs are in addition to the 30 jobs that Lockheed Martin added late last year to support the increasing F-35 production rate. The new facility is expected to be operational by mid-May.

On Apr 24, 2018, Lockheed Martin reported first-quarter 2018 earnings from continuing operations of $4.02 per share, which surpassed the Zacks Consensus Estimate of $3.35 by 20%. In the reported quarter, total revenues came in at $11.64 billion surpassing the Zacks Consensus Estimate of $11.30 billion by 2.9%.

Revenues

In the reported quarter, total revenues came in at $11.64 billion, surpassing the Zacks Consensus Estimate of $11.30 billion by 2.9%.

Moreover, the top line was also up 3.8% from $11.21 billion a year ago. Notably, all segments registered year-over-year growth in sales, except Space Systems.

Details of the revenue segments, as per the Zacks Digest model, are as follows:

Aeronautics: Revenues at this segment increased 7% year over year to $4.4 billion. The improvement was primarily driven by higher net sales from the F-35 program on account of increased production and sustainment volume. Increased net sales for other combat aircraft modernization programs backed by volume expansion also boosted the segment’s top line.

Missiles and Fire Control: Quarterly sales rose 8% year over year to $1.7 billion owing to higher net sales for increased volume on classified programs as well as tactical missiles programs backed by increased volume.

Rotary and Mission Systems: Quarterly sales of $3.2 billion grew 3% on account of higher sales for training and logistics solutions programs, integrated warfare systems and sensors programs as well as command, control, communications, computers, cyber, combat systems, intelligence, surveillance and reconnaissance (C6ISR) programs.

Space Systems: Revenues at this segment dropped 3% year over year to about $2.3 billion in the first quarter. The decline can be primarily attributed to lower volumes for government satellite programs and commercial satellite programs.

Backlog

Pentagon’s prime defense contractor, Lockheed Martin, ended the first quarter (on Mar 25, 2018) with $104.8 billion in backlog, down 0.7% from $105.5 billion at the end of first-quarter 2017. Of this, the Aeronautics segment accounted for $35.1 billion while Rotary and Mission Systems contributed $30.1 billion. Also, $21.5 billion came from Space Systems and $18 billion from Missiles and Fire Control.

Guidance

Lockheed Martin has raised its 2018 financial guidance. The company expects to generate revenues in the range of $50.4-$51.9 billion compared with the prior guidance of $50.0-$51.5 billion.

FY19 Defense Budget Proposal

As part of the fiscal 2019 defense budget proposal, $686.1 billion is being kept as funding for the Pentagon, reflecting 5% growth over the initial FY18 President’s budget. This increased spending provisions hint that the U.S. government might spend more on defense primes like Lockheed Martin. Notably, the budget has allotted $10.7 billion for procurement of 77 F-35 Joint Strike Fighters.

Moreover, the budget includes an investment plan of $1.7 billion for the procurement of 43 AEGIS Ballistic Missile Defense and $1.1 billion for 82 THAAD missiles. In addition, the company has noticed that the Consolidated Appropriation Act of 2018 included increased funding for 20 additional F-35 fighter jets, 17 additional C-130J transport aircraft, 16 additional Blackhawk and Seahawk helicopters, two CH-53 K helicopters and increases in multiple missile production programs. All these expansionary budgetary updates will immensely boost this defense prime's business growth.

Margins

Lockheed Martin’s business segment’s operating profit improved 20.1% year over year to $1.31 billion.

Interest expenses were $155 million at the end of the first quarter, in line with the year-ago quarter level.

Details of segment operating profit, as per the Zacks Digest model, are as follows:

Aeronautics

While operating profit advanced 8% year over year to $474 million, operating margin expanded 10 bps to 10.8%.

Missiles and Fire Control

Operating profit improved 12% year over year to $261 million while operating margin expanded 50 bps to 15.6%.

Rotary and Missions Systems

Operating profit improved a solid 143% year over year to $311 million and operating margin expanded 550 bps to 9.6%.

Space Systems

Operating profit was down 9% to $264 million while operating margin contracted 70 bps to 11.3% in the quarter.

Earnings per Share

Lockheed Martin reported first-quarter 2018 earnings from continuing operations of $4.02 per share, which surpassed the Zacks Consensus Estimate of $3.35 by 20%. The earnings figure also came in higher than the year-ago figure of $2.69 per share, by 49%.

Guidance

The company currently expects 2018 GAAP earnings per share to be in the band of $15.80-$16.10, up from the earlier guidance of $15.20-$15.50.

Outlook

Buoyed by Lockheed Martin’s solid product portfolio along with lower tax rates for 2018, a few bullish firms have raised their 2018 earnings outlook for Lockheed Martin.

May 1, 2018

|Research Analyst |Raj Karnani |

|Copy Editor |Proma Bhattacharjee |

|Content Ed. |Aparajita Dutta |

|Lead Analyst |Aparajita Dutta |

|QCA |Jewel Saha |

|No. of brokers reported/Total |13/14 |

|brokers | |

|Reason for Update |1Q18 Earnings Update |

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May 3, 2018

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