Lockheed Martin Wins Deal To Provide Aegis Support To Japan

Lockheed Martin Corp.’s (NYSE:LMT) Mission Systems and Training business unit recently secured a modification contract worth $31.1 million from the U.S. Navy. The deal requires Pentagon’s largest defense contractor to offer shipboard testing and integration services to support Japan’s Aegis modernization program.

Details of the Deal

Majority of the work related to this foreign military sales (FMS) contract will be executed in Moorestown, NJ; while the rest will be carried out in the Nagasaki, Yokohama and Maizuru cities of Japan. The deal has been awarded by the Naval Sea Systems Command, Washington, DC.

What’s Aegis?

Lockheed Martin’s Aegis Ballistic Missile Defense (ABMD) is the naval component of the U.S. Missile Defense Agency's (MDA) Ballistic Missile Defense System (BMDS). It is the world’s only maritime BMDS that can simultaneously attack land targets, submarines and surface ships, while protecting the fleet against aircraft, cruise missiles and ballistic missiles.

Over time, Aegis has evolved new capabilities to counter emerging threats and leverage new technologies. Its latest configuration, Baseline 9, offers an open architecture framework to allow extreme flexibility.

Japan-ABMD Link

The Aegis family of fleets has been Japan’s defense strength since 1993. The nation upgraded its four Kongo class and two Atago-class Destroyers with BMD operational capabilities; making ABMD the first-ever missile defense capability of the MDA that has been purchased by an ally.

A further development in this alliance is reflected by the SM-3 Cooperative Development Program – a brainchild of the U.S. and Japan governments. Through this program, the countries will develop a 21-inch diameter variant of the SM-3 missile, designated SM-3 Block IIA, to beat longer range ballistic missiles. Deployment of the same is slated to begin in 2018.

Meanwhile, Lockheed Martin struck a FMS deal worth $490 million in August with Japan and the Republic of Korea. Per the terms of the contract, the seventh and eighth generation Aegis ships will join Japan's fleet.

Our View

Lockheed Martin’s Mission Systems and Training business executes some of the company’s high-profile programs including the Aegis Combat System, Littoral Combat Ship, MH-60 helicopter avionics, as well as military and commercial orders. The company expects this unit’s sales to grow in the mid-double-digit percentage range in 2016.

Currently, apart from Japan, Lockheed Martin’s Aegis system is the maritime weapon system of choice for five other powerful nations. Considering this and the aforementioned developments, we expect the the latest contract to likely help management attain the sales target for the Mission Systems and Training division.

Zacks Rank & Stocks to Consider

Lockheed Martin currently carries a Zacks Rank #4 (Sell). A few better-ranked stocks in the aerospace and defense sector include AAR Corp. (NYSE:AIR) , Engility Holdings, Inc. (NYSE:EGL) and CAE Inc. (TO:CAE) . All the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AAR Corp witnessed a 1.89% rise in its stock price over the last five days. The company’s current year consensus earnings estimate improved 5% over the same time frame.

Engility Holdings rallied 0.49% in the last five days. The company’s current year consensus earnings estimate improved 2.2% over the last 60 days.

Over the last five days, CAE Inc. gained 3.56%. The current year consensus earnings estimate for the company rose 1.4% over the last 60 days.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>