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Lockheed beats 2Q estimates; $5.58B advance fuels brighter outlook

A U.S. Air Force F-35 Lightning II demonstration aircraft takes off during the AirPower over Hampton Roads Open House at Langley Air Force Base, Va., April 24, 2016. The aircraft performed alongside and F-22 Raptor and a P-51 Mustang as part of the Heritage Flight Program, which showcases the evolution of air power by flying today's state-of-the-art fighter aircraft in close formation with vintage fighter aircraft. (U.S. Air Force photo by Senior Airman R. Alex Durbin)

A U.S. Air Force F-35 Lightning II demonstration aircraft takes off during the AirPower over Hampton Roads Open House at Langley Air Force Base, Va., April 24, 2016. The aircraft performed alongside and F-22 Raptor and a P-51 Mustang as part of the Heritage Flight Program, which showcases the evolution of air power by flying today’s state-of-the-art fighter aircraft in close formation with vintage fighter aircraft. (U.S. Air Force photo by Senior Airman R. Alex Durbin)

Lockheed Martin Corp. raised its profit forecast weeks after a $5.58 billion down payment on the latest contract for its F-35 Lightning II fighter signaled the jet’s revenue potential.

Earnings will be $12.30 to $12.60 a share this year, 15 cents more than previously forecast, the company said in a statement Tuesday as it reported second-quarter profit that topped analysts’ estimates. In April, the world’s largest weapons maker lowered its outlook as profit fell short of expectations for just the third time this decade.

“After a hiccup last quarter, Lockheed is now back to the good old beat-and-raise playbook,” Robert Stallard, an analyst with Vertical Research Partners, said in a note to clients Tuesday.

Revenue is poised to increase as F-35 production moves into higher gear and the Bethesda, Maryland-based company benefits from getting past a contract impasse with the Defense Department. Investors have been fixated on margins for the plane since President Donald Trump said late last year that its costs were “out of control.”

Lockheed’s solid quarterly results did little to sway investors since shares were already at a record and the results were largely expected, said Seth Seifman, an analyst with JPMorgan Chase & Co.

‘Modest Upside’
“We would expect only modest upside on these results, though defense stocks do have significant momentum right now that could help,” Seifman said in a note to clients.

The shares rose less than 1 percent to $290.06 at 9:57 a.m. in New York. Lockheed climbed 15 percent this year through Monday, while a Standard & Poor’s index of aerospace and defense companies advanced 19 percent.

The F-35, also known as the Joint Strike Fighter, is of “extreme interest” to investors as Lockheed’s largest source of profit and growth, said Douglas Rothacker, an analyst at Bloomberg Intelligence. “It’s definitely a revenue driver for the company right now,” with deliveries set to increase more than 40 percent this year, he said.

Aeronautics sales jumped 19 percent in the second quarter from a year earlier as Lockheed started to accelerate F-35 output. Rothacker said he expects similar double-digit growth to continue for the company’s largest division during the second half of the year.

F-35 Deliveries
Second-quarter profit from continuing operations rose to $3.23 a share. Analysts had predicted $3.11, according to the average of estimates compiled by Bloomberg. Revenue from continuing operations increased 9.6 percent to $12.7 billion, while analysts anticipated $12.4 billion.

Lockheed is likely to get a boost from “back-loaded” F-35 deliveries, Douglas Harned, an analyst at Sanford C. Bernstein & Co., said in a report Monday. The company has said it will deliver 66 of the jets this year, up from 46 last year. Lockheed this month was awarded the interim payment for the 11th contract for the jets to help defray costs until it reaches a final agreement with Defense Department negotiators.

Sales for the rotary and mission systems division rose 3 percent as Lockheed delivered three Sikorsky helicopters compared with none a year earlier. Missiles and fire control revenue dipped due to lower sales of the PAC-3 missile defense system, but the unit’s operating profit was “in-line” at $269 million, said Vertical Research’s Stallard.

As the first U.S. defense company to report earnings, Lockheed sets the pace for Boeing Co., Northrop Grumman Corp., General Dynamics Corp. and Raytheon Co., which are slated to unveil results over the next two weeks.