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Lockheed Martin Corporation (LMT), Raytheon Company (RTN): Invest in a Reducing Defense Budget?

Aerospace contractor Lockheed Martin Corporation (NYSE:LMTis largely dependent on the U.S. government, particularly the Department of Defense. As U.S. defense spending cuts loom, the company has lowered its sales expectations for 2013. With demand for fighter jets rising in foreign markets, Lockheed Martin Corporation (NYSE:LMT) is now looking abroad to reduce the impact of these cuts.

Lockheed Martin Corporation (NYSE:LMT)

Fundamental review

Lockheed Martin Corporation (NYSE:LMT) is trying to maintain earnings by cutting overhead and increasing weapons sales to other countries. The company’s second-quarter earnings jumped 10% to $859 million, while revenue decreased 4% to $11.4 billion. Lockheed Martin Corporation (NYSE:LMT) lifted its full-year profit forecast, and now expects earnings per share of $9.20 to $9.50 in 2013. For 2013, analysts have forecast lower sales and earnings for the company because of the reduction in U.S. military spending.

Reducing defense budget

Last year, Lockheed Martin Corporation (NYSE:LMT) generated 82% of its total revenue from the U.S. government, including 61% from the Department of Defense. The company warned that this year, those sales would likely decrease by $825 million.

The U.S. government’s defense budget is $526.6 billion for FY 2014, down slightly from $527.8 billion in FY 2013 and $530.4 billion in FY 2012. Among those cuts, the Defense Department has cut back its spending on Lockheed Martin Corporation (NYSE:LMT)’s leading fighter jet, the F-35. Further budget reductions will likely take an additional toll on Lockheed’s sales.

Overseas market

To compensate, Lockheed is now focusing on overseas markets such as the Middle East and India. The company currently generates 17% of its revenue from foreign markets, wants to expand this percentage more than 20%.

Its industry peers like Raytheon Company (NYSE:RTNand The Boeing Company (NYSE:BAare generating nearly 26% and 42% of their sales, respectively, from outside the U.S.

Raytheon Company (NYSE:RTN) expects its international sales will generate about 30% of revenue in coming years, including prospective contracts with Kuwait, Qatar and Turkey for missile defense systems and other equipment.

Besides commercial jets, The Boeing Company (NYSE:BA), the world’s largest aerospace company, also makes military aircraft. Boeing has made a bid of $7.4 billion to supply South Korea with 60 fighter jets. Boeing looks very close to winning this deal, because its bid was the only one below the price ceiling set by South Korea’s arms procurement agency.

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