TD Cowen Downgrades Lockheed Martin (LMT) to Hold

TD Cowen analyst Gautam Khanna downgraded Lockheed Martin (NYSE: LMT) from Buy to Hold with a price target of $480.00.

The analyst comments "(1) F-35 Overhangs May Persist - The plethora of F-35 overhangs may not clear this year. For example, it is anticipated that LMT will take until H1:26 to fully implement its TR3 software upgrade to make F-35 aircraft combat capable (this impacts cash collections). Moreover, the F26 DoD budget request pares the Air Force's expected F-35 purchase by 20 aircraft, & it's unknowable if Air Force F-35 purchases in future years (F27+) will remain below previously expected levels. (The DoD FYDP- plan beyond F26- has not been disclosed yet, but advanced procurement disclosures made in the F26 DoD request suggest lower F-35 buys may continue). On the plus side, LMT's CEO appears intent on upgrading the F-35 to make it more competitive, by spiraling in NGAD (F-47) capabilities into the F-35 platform. Moreover, there's a chance that Congress will backfill the requested cut, or that foreign demand will fill the gap, but this is not knowable yet. Thus, the "burden" on LMT's stock will be difficult until the reality is known -- i.e. to disprove that the DoD's intention won't actually happen, again and again, over the course of the remaining 3 years of the Trump Administration. This reality is apt to prevent a major upward re-rating of LMT's stock, given the F-35's importance to LMT's earnings base. (2) Execution Risk Limits Upside To Street Ests - Since Q1's print, LMT has emphasized the risk of Q2 charges at the Aero segment due to 1) the NGAD loss and the associated repositioning that may follow, & 2) cost overruns on a classified Aero program. (We presume that the troubled classified aero program is the same one that incurred $555MM of C24 charges). We are 5% below consensus Q2 EPS. Moreover, LMT didn't sign the F-35 Lot 18/19 contract in Q2, a negative $1B FCF delta w/ Street estimates. Thus, LMT may pare C25 guidance on the Q2 print. This seems well-telegraphed, as LMT has been visible with investors in Q2, but nonetheless, it limits the potential for upside on the Q2 print."

For an analyst ratings summary and ratings history on Lockheed Martin click here. For more ratings news on Lockheed Martin click here.

Shares of Lockheed Martin closed at $463.06 yesterday.

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