Investing View: Why Small Contracts Can Lead to Big Profits During Turbulent Times
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There’s an old adage in business that big contracts command big headlines. But bigger isn’t always better. All too often, companies that focus only on big contracts discover there are very lean stretches between contract awards. And that affects the predictability of their earnings.
That’s why here at Money Morning we’re more interested incompanies that can secure a lot of smaller contracts on a consistent basis - and that can transform those deals into predictable, double-digit growth.
We refer to these modest-contract specialists as the “Masters of the Small Bid.”
Let me explain…
As we’ve stated, the companies we’re targeting aren’t characterized by headline-grabbing mega-contract wins, but by their proven ability to land smaller, more-stable deals. You see, by spreading their risk across many smaller deals rather than just swinging from the heels every time, the companies we follow are able to generate a consistent stream of earnings - despite a slowing economy, a wrenching credit-crisis and damaged investor confidence.
In short, our “masters” have kept themselves in front of paying customers at a time when other firms are simply worried about having customers.
Let’s look at several strong examples.
A Sample of Strong-Bid Masters
It’s no coincidence that our first example - defense-contractor and aerospace expert Lockheed Martin Corp. (LMT) - has been around for decades, and is a proven survivor. Remembered as the designer of the P-38 Lightning fighter of World War II fame - an aircraft so deadly that Nazi leaders ruefully dubbed the twin-boomed airplane “The Fork-Tailed Devil” - Lockheed Corp. went on to build the graceful Lockheed Constellation airliner in the 1950s and the cutting-edge F-117A Nighthawk Stealth Fighter in the 1980s.
A disastrous foray into commercial jetliners - in which only 250 airplanes were sold, even though the program lasted from 1968 until 1984 - would have likely bankrupted many companies. But Lockheed’s been a survivor. Indeed, back in the 1990s, to keep pace with a wave of defense-sector consolidations that created a smaller group of bigger players, Lockheed linked up with Martin Marietta Corp. to form Lockheed Martin.
Lockheed Martin re-established its fame with the so-called “Skunk Works” advanced-technology unit, and even today remains a defense-sector heavyweight. But it’s also a Master of the Small Bid. For proof, just look at some recent deals.
Lockheed roared into April, landing a $50 million contract for the U.S. Navy on April 1, and a $234 million Air Force contract on April 2. A week later, the company landed a deal a day for four straight days, in the process rolling up $725 million in total business from the U.S. Army, the Turkish military, and Japan’s Mitsubishi Heavy Industries Ltd.
The rest of the month saw still more action as the Navy signed on Lockheed for a one-year, $15.5-million contract for continued program management and engineering services for the United Kingdom’s Trident II D5 Fleet Ballistic Missile (FBM) program. The company closed the month in a decisive manner with two more major deals on April 30. The National Aeronautics and Space Administration (NASA) signed a $39.5 million contract modification with Lockheed Martin Space Systems to implement an employee-retention program, while the Navy supplied a contract boost worth up to $190 million to supply tooling and special test equipment for its new F-35 Joint Strike Fighter.
Not a bad month’s work. And it’s certainly representative of how Lockheed generates a predictable earnings stream. Because of deals such as these, the company’s share price rose nearly 8% in the month of April alone. In May we’ve been seeing even more deals, and the stock is advancing again.
Clearly, small deals can have a big impact on a company’s bottom line.
The Gamer That Doesn’t Play Games
At a time when other gamers are worrying about the next best thing, Japan-based Konami Corp. (ADR: KNM) retooled one of their most successful releases, Metal Gear Solid, adapted it for mobile phones, and then built up a lot of buzz as they pushed it out to customers of the Verizon Wireless unit of Verizon Communications Inc. (VZ).
Not only did Konami save a lot of money because it wasn’t developing a new platform from scratch, it also kept its audience smaller to produce bigger returns per person.
While the pumped-up adolescent males soak up this stealth shooter game, Konami hasn’t forgotten to take care of the over-moneyed and under-served teenage-girl market with its recent new game, “Diary Girl.” The Nintendo Co. Ltd. (OTC ADR: NTDOY) Nintendo DS game provides girls of all ages the ability to interact with friends, while also organizing a calendar and address book in their own, password-protected electronic journal.
A month ago, Konami announced an agreement with Win Systems International Holdings Inc., to use Konami content in certain of Win’s pending lottery and gaming projects in Europe and Latin America.
Deals like this have caused Konami’s shares to seek higher ground. With a 19% gain over the past three months, the only thing that could help this company even more is if it had a highly awaited Sony Corp. (ADR: SNE) PlayStation 3 game coming in the near future - which just happens to be the case. Metal Gear Solid 4, the highly awaited PlayStation 3 game, will debut June 12.
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Tags: BZ, china, Chinese Consumers, credit crisis, Defense Contractor, fbm program, Investor Confidence, KNM, LMT, Lockheed Martin Corp, Metal Gear Solid 4, MGM, Mitsubishi, NTDOY, PEP, SNE, US stocks, Win Systems International Holdings, YUMAbout the Author
Steve Waters is a contributing writer to Money Morning.
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