Uncertainty regarding defense spending
The U.S. government is Lockheed Martin’s (LMT) major customer. With almost 82% of its revenues from the U.S. government, LMT highly depends on the government. In fact, last year, the company’s revenue declined due to the $37 billion cuts in defense spending due to sequestration. These cuts are in addition to the $500 billion (spread over ten years) in spending cuts imposed by the Budget Control Act (BCA) of 2011.
The impact of sequestration was partially offset in 2014 and 2015 due to the Bipartisan Budget Act. However, beyond 2015, there’s high uncertainty as to the availability of funds for various defense programs, especially as the deadlock between Congress and government continues. Also, Lockheed Martin is highly sensitive to political changes that may affect defense spending. This may pose a significant threat to Lockheed Martin’s future revenue.
U.S. government regulations
The company has to ensure that it fulfils the requirements of the U.S. government before it can export to other countries. For example, the company wasn’t allowed to export its F-22 aircraft in the past due to U.S. government restrictions. In the future, too, the company may not be allowed to export to China or other countries that aren’t U.S. allies—despite China’s spending being the second highest in the world, after the U.S.
High competition from international defense players
With the U.S. government’s defense spending being uncertain, Lockheed Martin’s management has started looking for different sources of revenue. One of its focus areas in the past few years is improving international sales. However, the company faces stiff competition from international defense players like BAE Systems and Airbus. One of the major disadvantages Lockheed Martin has over these players is that the technology transfer isn’t restricted by their respective governments. As a result, Lockheed Martin may lose out on major defense contracts.
Other defense equipment manufacturers also facing similar risks include Rockwell Collins (COL), The Boeing Company (BA), and Excelis Inc. (XLS). Some of these companies are also part of the Industrial Select Sector SPDR (XLI).