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Profit With a Company That Gets $260 From Every Household in the U.S.

January 12, 2011 | About:

Street Authority

17 followers
With the market soaring to two-year highs, is it time to play offense or defense? Only hindsight will tell for sure. However, one thing is obvious right now: The crowd is playing offense.

As the prognosis for a stronger recovery has increased, investors have been gravitating toward more aggressive sectors of the stock market. But I'm not sold. My instincts tell me that when the crowd is playing offense, it's a good time to start playing defense.

For example, the market's top performing sectors for 2010 included cyclical industries such as technology, industrial materials and consumer products. In fact, these cyclical sectors have been among the market's best performing since the market's bottom in March of 2009. Can this nearly two-year run continue?

On the other hand, defensive industries (those with earnings less dependent on the economy) have been laggards in the market recovery. For example, the utilities, health care, and defense sectors have been among the worst-performing market sectors for the past two years. I think these sectors may be due for a reversal of fortune -- I'm particularly interested in the defense industry.

After outperforming the market for most of the last decade, Morningstar's Aerospace and Defense industry category has underperformed the S&P 500 for the last two years. But that could change soon...

Not only is the defense sector a defensive industry in this go-go market, but investors have feared that the current debt and deficit fiasco will lead to severe cuts in the defense budget. In addition, the war in Iraq is winding down and the Obama administration seems determined to bring fighting in Afghanistan to an end as soon as possible. All this threatens to bring down the demand for new weapons systems and other initiatives, thus reducing revenue for defense contractors.

In fact, the axe is already coming down on the defense budget. Just last week, Defense Secretary Robert Gates announced $78 billion in defense spending cuts during the next five years to go along with the $100 million in cuts already planned. However, the cuts were less than expected.

The market may well have overblown the negative effect of likely austerity measures on defense contractors. For one thing, this is still a dangerous world: the constant threat of terrorism looms, and tensions are rising in North Korea and the Middle East. Also, the defense industry provides a huge number of jobs, which the government will be reluctant to see cut.

So I set out to find the most defensive stock in the defense industry. And I'm pretty confident I've found it. In fact, this company is the single largest private recipient of U.S. tax dollars. It was handed an estimated $36 billion from Uncle Sam in 2009 -- about $260 from every single household in the United States.

The company I'm talking about is Lockheed Martin (LMT), the world's largest defense contractor.

Lockheed's stock currently sells at just over 10 times estimated 2010 earnings, compared to an industry average of about 12.4. Lockheed's valuation is one of its lowest in the past 10 years and represents an incredible opportunity to scoop up a solid, defensive name at a recent price. The stock is nearly 40% below its pre-financial crisis high of about $116. It also pays an industry high dividend yield of more than 4%.

The company operates in four divisions; Aeronautics (combat aircraft and logistics), Electronic Systems (air and missile defense systems), Information Systems and Global Solutions (air traffic and battle field communications systems) and Space Systems (satellites and ballistic missiles).

While some weapons systems will be scaled back, a huge part of Lockheed's revenue is generated by maintaining old weapons systems, which should continue in any administration. And while the U.S. government accounted for 85% of sales in 2009, Lockheed's international sales are strongly increasing.

Consensus analyst estimates call for Lockheed to grow earnings by an average of more than 10% a year for the next five years. This is quite believable, considering the company has grown earnings per share from just $1.05 in 2000 to $7.78 in 2009. And during this time, Lockheed has grown its dividend by an average of 20% a year during the same period.

The company is cash rich -- $2.5 billion in free cash flow easily covered $690 million paid out in dividends in the first nine months of 2010. Lockheed has announced that extra cash will be used to buy back $3 billion worth of shares (about 12% of the total outstanding), which will not only increase shareholder value but is also a vote of confidence by management in the future performance of the stock.

Action to Take --> Lockheed is currently an undervalued stock with a high (and growing) dividend yield and solid earnings prospects going forward. The stock is a good pick for investors wanting a safe income-generating bet in an uncertain market.

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-- Tom Hutchinson

Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

About the author:

Street Authority
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Comments

energywonk
Energywonk - 3 years ago
im australian, but i thought big defence cuts were on the cards and the f35 is a total dud. i think there are also moral considerations about a war machine if you are so inclined.
roke6362
Roke6362 - 3 years ago
My question to the author of this article is: What should be more important, the article endorsing LMT as an investment or the disclosure that you or your employer have chosen not to take a position?

By the way, I do own LMT. It represents approximately 10% of my equity holdings.
energywonk
Energywonk - 3 years ago

China's superior flight-path

Robert Gottliebsen

Published 6:33 AM, 19 Jan 2011




In so many ways we are seeing the Chinese treating Americans leaders cordially and nicely, but nonetheless with indifference. There is no respect for a nation that in China's eyes continues do itself harm and has not yet understood that there is a massive change in the balance of power coming around 2015.

But what is almost unbelievable is that the US and Australian communities are not being alerted to this event by their journalists.

Very few journalists covering the visit by the US Secretary of Defence Robert Gates to China last week picked up that it was no accident that the Chinese showed Gates that their giant J-20 Stealth Fighter was superior in almost every respect to the Joint Strike Fighter being developed by the Americans. Defence analysts around the world already knew this but the Chinese chose the Gates visit to rub his nose in the pit of American folly.

The global debate in defence circles is now whether the Russian/Indian developed PAK-FA T-50 is better than the Chinese aircraft – the JSF is simply not in the hunt. Indonesia has already purchased 180 of the Russian aircraft (Australia's mission critical, October 4).

During the Christmas break Chris Kenny writing in The Australian bemoaned the fact that in 2010 the Canberra press gallery had not grasped the fact that Kevin Rudd had lost his way and so his sacking came as a huge shock to the Australian and world communities. Kenny blamed part of this failure on the political leaning of journalists. That might be right in part, but I believe most of the journalistic failure was caused because they were snowed by the Rudd people who were often their source of stories and they were reluctant to cut them off.

The Wikileaks affair shows gaps in global journalism. Facts are being released that should have been discovered by journalists – as in the Rudd affair, journalists have been snowed.

But the greatest global snow job of all is the Joint Strike Fighter. Few defence writers are prepared to tell their readers the truth that the JSF has been swamped first by the Russian aircraft and now by the Chinese.

Former Australian defence minister John Faulkner started to understand the magnitude of what was happening and stepped aside. It is very hard for the politicians to take on the military bureaucracy who will not admit error.

The only way it is possible is if journalists do their job. At the weekend Fairfax defence correspondent Dan Oakes quoted a leading defence analyst saying that the Chinese Fighter had changed the balance of power. It was good and encouraging reporting, but Oakes could have gone much further given that we are buying the JSF lemon.

All Australian defence journalists should go to the Australian Defence museum and look at the photo of Australian airmen boarding the Buffalo aircraft at the start of World War II as they prepared to take on the Japanese Zero aircraft .

The Australians had no hope and almost all lost their lives. Japanese air power was crucial to Singapore falling. In the second half of this decade, if Australian airmen flying the JSF are asked to try to defend Australia against Indonesian, Indian, Chinese or others who have far superior aircraft, then those Australians will face the same fate as those who were given the Buffalo to tackle the Zero.

This is a very important time for serious US and Australian journalism.
energywonk
Energywonk - 3 years ago
ps. lockheed is a total dud stock and should be shorted.

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