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The Boeing Company (BA), Lockheed Martin Corporation (LMT): Two Key Buys in the Aerospace Industry

In a recent development, the company got approval from the FAA for its new lithium-ion battery. Previously, the FAA banned its 787 Dreamliner aircraft following incidents of the battery overheating and burning. This ends a three-month ban on flying these aircraft, which was becoming a major threat for Boeing.

Lockheed Martin

Lockheed Martin Corporation (NYSE:LMT) got a $101 million contract from the U.S. Department of Defense for the maintenance of Aegis Weapon and Combat Systems for destroyers. Lockheed Martin Corporation (NYSE:LMT) has been the sole source for this program since 1969, but this time it won the contract amid bids from other players, including Raytheon and Boeing. Raytheon previously built radar systems for Zumwalt Class Destroyers and Boeing is the lead contractor for the Ground Based Missile Defense (GMD) System.

However, this contract was awarded to Lockheed Martin Corporation (NYSE:LMT) because of its history with this department. Though this contract is for a relatively smaller amount, it is estimated that this overall program will account for $500 million of the company’s annual sales.

Lockheed has tied up with Boeing to sell the US Government medium-and-heavy lift rockets for the next five years. The deal is expected to be finalized in the second quarter and remains under negotiation. The terms and value have not been disclosed by both the companies yet, but if it gets through this will present a healthy opportunity to both the companies in the coming years.

With these deals/orders in Lockheed’s bag, the stock looks in a good position to generate the industry’s highest  return, as it did in 2012 with 34.9%. Also, the company had an order backlog of $82.3 billion by the end of 2012.

One point of concern for Lockheed Martin Corporation (NYSE:LMT) is the US government’s decision surrounding sequestrations in which the government will reduce its defense budget by $500 billion in the next 10 years. As Lockheed Martin gets 80% of its revenue from the government, this will hurt its future performance. However this downside will have limited effect, as the F-35 orders will be reduced by only one or two aircraft in a year.

Conclusion

Even though there is a lot of talk about the proposed decrease in the US defense budget, I see this to have a minimal effect on the new aircraft orders for companies like Lockheed Martin Corporation (NYSE:LMT). It will continue to get its shareholders’ trust with its relatively strong position in the defense industry, clearly depicted from its deal with Boeing and the new contracts with Department of Defense.

On the other hand, The Boeing Company (NYSE:BA) will keep its growth momentum with the increasing demand of 737, 737 Max and 777X commercial aircraft. The increasing demand and the improving line of production will help the company to generate higher revenue.

Looking at the above long-term growth fundamentals, I will recommend buying both of these aerospace stocks for long-term growth.

The article 2 Lucrative Buys in the Aerospace Industry originally appeared on Fool.com and is written by Madhu Dube.

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