Lockheed Martin (LMT) has consistently delivered positive earnings surprises with an average beat of just over 20% over the last four quarters. Shares have left the terminal and are on the tarmac getting ready for take off due to emboldening first quarter numbers that have allowed management to increase its operating profit, cash from operations and earnings per share forecast for 2014 with the international mix projected to rise to 20% of total sales this year. In 2013, Lockheed Martin’s net sales were $45.4 billion.

Shareholders on this flight have already been rewarded with share repurchases and incremental dividends including seventy-eight percent or $1.6 billion of a record $2 billion in free cash flow in the first quarter. Shares will soar because the largest U.S. defense contractor Lockheed Martin has a platform-centric focus that assures a continual inflow of follow-on orders from its leveraged presence in the Air Force, Army, IT, and Navy programs. We expect clear skies as the I Know First self-learning algorithm based on predictive analytics also has a bullish signal for this aerospace and defense behemoth, as well as LMT has a mean price target of $170.56 from 18 brokers on Yahoo! (YHOO) finance. Lockheed Martin’s diverse range of products have allowed this company to win multiple contracts mainly from the U.S. Department of Defense (DOD), varying from big to small, despite the “sequestration.”

The Final Frontier

Recognizing the potential in this market, Lockheed has increasingly invested in R&D and acquisitions in order to strengthen its satellite product coverage. As such, the company is anticipated to acquire Zeta Associates Inc., in the next quarter as it already acquired Astrotech Space Operations, a company specializing in prelaunch processing of satellites in May of 2014.

The US Air Force has also recently awarded a contract for the sustainment of the reentry subsystem for the Minuteman III intercontinental ballistic missile (ICBM) system to Lockheed Martin. In this contract, the company will provide support through maintenance engineering, aging surveillance, modification of subsystems and equipment, software maintenance, developmental engineering, production engineering, repair and procurement of the MMIII RS/RV Subsystems. Lockheed Martin Space Systems Company ICBM and advanced programs vice-president Doug Graham stated, “this new contract will enable us to directly apply our specialized expertise to more effectively support this critical national mission area.” The RS/RV contract has a one-year base performance period valued at $109 million with options for an additional four years and a total potential value of $452 million.

GEO-5 & The GEO-6

This past June, Lockheed Martin also earned a $1.86 billion contract from the US Air Force to complete production of the Geosynchronous Earth Orbit (GEO) satellites, the GEO-5 and the GEO-6 through Sep 30, 2022. Lockheed is the prime contractor of these satellites under the military’s Space Based Infrared System (SBIRS) program. SBIRS is designed to provide the United States with an early warning of ballistic missile launches plus other tactical intelligence. Jeffrey Smith, vice president of Lockheed Martin’s Overhead Persistent Infrared mission area stated, “this contract is the third part of a thoughtful acquisition strategy aimed at further reducing cost and cycle time for GEO-5 and GEO-6, while still providing exceptional data to the warfighter.” This system gives the President of the United States, the Secretary of Defense, combatant commanders, the intelligence community and other key decision makers reliable and accurate missile warnings and infrared surveillance information.

The GEO-1 and GEO-2 satellites have both received Air Force Space Command Operational Acceptance in 2013 and have performed above its requirements in some cases. The GEO-3 is currently undergoing acoustic and thermal vacuum testing at Lockheed Martin’s Sunnyvale, California satellite manufacturing facility and is on schedule for delivery at the end of 2014. The GEO-4 recently entered final assembly, integration and testing. The SBIRS program is at the forefront of our national security and further demonstrates the U.S. military’s confidence in Lockheed Martin technology and its reputation as an aerospace and defense industry leader.

Clean-up On Isle Space

Aside from designing the super advanced fighter jets and helicopters that keep our air force at the forefront of aerospace and defense technology, Lockheed Martin will also help protect our skies by monitoring the vast junkyard of debris orbiting our planet. The company is tasked with developing a surveillance system called “Space Fence” awarded by the Air Force for a $914.7 million contract. Space missions from the last half-century, have left behind objects such as lost astronaut equipment, spent rocket stages and dead satellites still cruise high above at great speeds. For this reason, the surveillance system will greatly enhance the current ability to track cosmic debris. Dana Whalley, the government’s program managerstated, “previously, the Air Force could only track and identify items the size of a basketball…with the new system, we’ll be able to identify items down to the size of a softball. This will significantly increase our capability.”

The current system in place now is outdated to say the least, and could certainly use an update. In fact, it has been in use since 1957 when the Soviet Union launched Sputnik. The current system called the Space Surveillance Network is a worldwide network of 25 space surveillance sensors that use radar and optical telescopes. Space Fence will utilize uninterrupted radar pulses to detect, track and determine the orbits of such objects. It essentially forms a pulse-field fence with a higher wavelength frequency that objects would pass through. Many of the debris travel in clouds of celestial debris and can cause tremendous damage to the International Space Station and other important satellites we rely on. This floating wreckage can be thought of more as bullets traveling at speeds of up to 17,000 mph. About 22,000 objects are at least the size of a softball and hundreds of thousands smaller objects clog up the low earth orbit region.

A study from the National Research Council in 2007, warned that the amount of space debris was at a “tipping point.” The main problem is due to objects colliding with each other at such great speeds, creating many smaller ones in a domino effect. There were two big collisions in recent years that have dramatically added to the problem. The first was the 2007 Chinese anti-satellite test and the second was when an active U.S. commercial satellite that accidentally collided with a defunct Russian satellite in 2009. According to a Congressional Research Services report from January 2014, orbital debris is a threat to the United States national security interests in space. Figure 1 shows a computer-generated image by NASA from the perspective outside geosynchronous orbit . Ninety-five percent of the objects in this illustration are orbital debris (non-functioning satellites). Note that the orbital debris dots are scaled according to the image size of the graphic to optimize their visibility and are not scaled to Earth. The population of objects over the northern hemisphere is due mostly to Russian objects in high-inclination, high-eccentricity orbits.

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Prerequisites for every launch, whether it’s spy satellites, sending up astronauts, or digital television satellites, include being prudently synchronized for the reason of not being destroyed by the minefield of orbiting debris. Clearly there is a need for clean up of the dangerous objects floating above but the global community has decided that before a solution can be proposed, experts need to have a better understanding of the situation and assess the risk. This is where Space Fence comes in. Lockheed will begin production on the system in six months and it is expected to be operational by 2018.

Lockheed Martin will break ground at Kwajalein Atoll, an island located more than 2,400 miles southwest of Honolulu. It will be made up of small antennas clustered into an area about the size of a basketball court and will all sit under a dome made of Kevlar on Kwajalein Atoll. There is also an option for a follow up contract to create a second radar installation in western Australia. Steve Bruce, a Lockheed vice president of space systems stated, “the Air Force wants to protect its assets in space…We’ll be able to help them with that.” The actual solution to the vast amount of space junk may even become a contract for Lockheed Martin years down the road, although this is merely speculation.

Joint Projects

The company also landed a $1.28 billion joint project with the U.S. Air Force to build combat rescue helicopters with United Technologies Corp.’s Sikorsky Aircraft unit based in Connecticut. The Lockheed Martin-Sikorsky team will also build the next generation of presidential helicopters for a deal with the Navy worth $1.2 billion.

Another joint project Lockheed Martin is also working on is with the professional services contractor GCS, for a task order worth $400 million from the General Services Administration. The GSA works to enhance operational efficiency of government services toward the public. Together Lockheed Martin and GCS will predominantly modernize specialized applications, platforms and systems, as well as advance technical architecture development, security and software development services.

Turbulence To Be Expected

While Lockheed Martin has been successful at being awarded multiple contracts, investors should also take the negative factors into consideration. Lockheed Martin recently received a controversial $420 million tax break. The problem surrounding this issue is a $55 billion Air Force contract to build the next generation of bombers, which is also being sought by Boeing (BA) and Northrop (NOC). Lockheed requested tax credit to help make the Boeing bid more attractive to the Pentagon as it would be a major Boeing subcontractor on the project but Northrop cried foul, stating that there was last-minute favoritism was at play in Sacramento. Senate Appropriations Chairman Kevin de Leon (D-Los Angeles) criticized stating that it “exclusively focused for the benefit of one company.”

LMT shares also took a hit recently when it was reported that one of the F-35 Joint Strike Fighter’s engines caught on fire on June 23rd. An investigation into the issue has led to the grounding of the entire F-35 fleet. This can become a problem, as the $399 billion weapons program will miss out on appearing in different airshows. While the fire was from an engine on a F-35A, the Marines may decide to allow the F-35B jump-jet models to make the trip and fly at the airshows.

Bullish Algorithmic Prediction For Lockheed Martin

I Know First utilizes an advanced self-learning algorithm based on Artificial Intelligence (AI), Machine Learning (ML), and incorporates elements of Artificial Neural Networks and Genetic Algorithms in order to model and predict the flow of money in almost 2,000 markets from 3 days to a year. As such, we promote algorithmic trading coupled with a vigilant risk management strategy and fundamental analysis for avant-garde investment strategies designed to mitigate maximum amount of risk as well as to optimize potential returns. Just to be clear, this is not high frequency trading and the differences are explained here.

The market prediction system is entirely empirical and not based on human-derived assumptions. This system can also be referred to as a “Big Data” solution for Wall Street by incorporating popular types of convergence averages and moving averages that have been traditionally used to forecast assets with complex and intelligent algorithms that can make these predictions more accurate and efficient.

The human factor is limited to building the mathematical framework and initially presenting the system with the “starting set” of inputs and outputs, which is also utilized for recognizing every other market opportunity. The algorithm then repetitively proposes “theories” and recurrently tests them automatically on years of daily market data. It then validates them on the most recent data, which prevents over-fitting. By separating the predictable part from stochastic (random) noise, the algorithm is able to create a model that projects the future trajectory of the given market in the multi-dimensional space of other markets. The output of the predicted trend is a number, known as the signal, which is used by traders to identify entry and exit points in the market. While the algorithm can be used for intra-day trading, the predictability tends to become stronger over longer time horizons, such as the 1-month, 3-month and 1-year forecast, making this market prediction system ideal for longer-term trading.

The color-coded forecast is very easy to read, where green indicates a bullish signal and red indicates a bearish signal. Deeper greens signify that the algorithm is very bullish, and vice-versa for deeper reds. The signal is the number flush right in the middle of the box and the predicted direction (not a specific number or target price) for that asset, while the predictability is the historical correlation between the prediction and the actual market movements. In other words, the signal represents the forecasted strength of the prediction, while the predictability represents the level of confidence. These are two independent indicators, but consider both as you make your own analysis. Figure 2 shows an algorithmic prediction for LMT from 3 months ago. Algorithmic traders utilizing our Best Dividend Stocks Forecastreceived this forecast. The components of this forecast are the best stocks identified by the algorithm that also carry a dividend. Ticker symbols for other assets have been removed; however, you can still see their signal and predictability.

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In accordance with the algorithmic forecast, LMT rose 1.65% over the stated time horizon. LMT had a signal of 3.67 and predictability of 0.28 in the April 9th 3-month forecast. Comparing the algorithmic performance from the forecast above to the most contemporary forecast is an excellent strategy for rationalizing your expectations utilizing algorithmic trading as one instrument in your analysis process. Figure 3 shows the current algorithmic prediction for LMT in the 1-month, 3-month and 1-year time horizons.

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The signals in this most contemporary forecast are much stronger than the signal above in the April 9th 2014 forecast. This is even the case for the current 1-month time horizon forecast. LMT consistently stays in the deeper green parts of the heat map, demonstrating the bullishness of the algorithm. The general coloring of the heat map helps give algorithmic traders another indicator of confidence in the forecast. For instance, a heat map that is predominantly green should give supplementary assurance in the forecasted assets.

Conclusion

These bullish signals should give investors some assurance that LMT shares will rise further over the stated time horizons. Algorithmic traders utilize these daily forecasts as a tool to enhance portfolio performance, verify their own analysis and act on market opportunities faster. We never recommend blindly purchasing assets that are endorsed by the algorithm without your own additional analysis. Lockheed Martin stands to be a strong investment while the sustainability of this 5-year bull market is being questioned, which is elaborated further by my colleague.

The company has a beta of 0.62, strong stock price performance, an enticing dividend, it has shown its ability to increase in net income, growth in earnings per share and cash flow from operations as well as its noteworthy return on equity. Earnings growth for instance played a significant role over the past year, increasing share value over 45% and beating the S&P 500 return over the same time frame. During the past fiscal year, Lockheed improved its bottom line by earning $9.04 versus $8.34 in the prior year with expectations of further improvement in earnings to $10.94. The company has also been able to increase net income from $761 million to $933 million year-over-year, an increase of 22.6%. In summation, based on the convergence of these encouraging investment measures supported by the awarded contracts, some of which mentioned here plus the algorithmic forecast based on predictive analytics, makes LMT currently a buy.

Business disclosure: I Know First Research is the analytic branch of I Know First, a financial services company that specializes in quantitatively predicting the stock market. Joshua Martin, an I Know First Research analyst, wrote this article. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.