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More Conflicts in the World Benefit Lockheed Martin

August 15, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Lockheed Martin Corporation (LMT), a $53.8 billion market cap company, which is the world's largest military weapons manufacturer.

Portfolio

Lockheed Martin is the world's largest military weapons maker. It is also an important supplier to NASA and other non-defense government agencies.

Last year sales rose $45.4 billion, 82% from its net sales from the U.S. government, including the Department of Defense (DoD) as well as non-DoD agencies. Sales to foreign governments contributed 17% and the remaining 1% of net sales to commercial and other customers.

Aeronautics segment

The Aeronautics segment (almost a third of 2013 revenues) makes fighter jets and military transport planes. The well-known programs include the F-35 Lightning II, the F-16 Fighting Falcon, the F-22 Raptor, the C-130J Hercules transport plane and the C-5M Super Galaxy modernization program.

The F-16 program continues to be a jewel for the firm, with 4,534 aircraft delivered. With respect to the F-35 program, sales to the U.S. government accounted for half of Aeronautics' net sales in 2013. The company´s goal for the F-35 is to use a common platform across all armed forces while reducing maintenance costs.

Number one techno provider

In the last 18 years, the company has provided information to the U.S. government. When talking about space systems, the majority are satellites, missile systems and space transportation systems. Almost all the revenue comes from the U.S. government and we expect this trend to continue.

Strong dividends

Since 1995, Lockheed has a dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 3.03%, which can improve in the future allowing higher shareholder´s returns.

Revenues, margins and profitability

Despite negative revenue growth, earnings per share increased in the most recent quarter compared to the same quarter a year ago ($2.76 vs $2.64). During the past fiscal year, the firm increased its bottom line by earning $9.04 versus $8.34 in the prior year. This year, Wall Street expects an improvement in earnings ($11.25 versus $9.04).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

LMT

Lockheed

60.61

BA

The Boeing Company

30.82

NOC

Northrop Grumman Corporation

18.38

RTN

Raytheon Co

18.09

 

Industry Median

11.26

The company has a tremendous current ROE of 60.61%, which is higher than the one exhibit by its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1408069117504.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 17.5x, trading at a discount compared to an average of 21.5x for the industry. To use another metric, its price-to-book ratio of 12.4x indicates a premium versus the industry average of 2.7x while the price-to-sales ratio of 1.2x is above the industry average of 1.16x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $26,342, which represents a 21.4% compound annual growth rate (CAGR).

1408069087583.png

As we can appreciate, the company's shares rose about 31% over the past year.

Final comment

As outlined in the article, the company´s good portfolio, its key star Aeronautics segment as well as being a leader provider of information to the government, makes Lockheed a good bet. Moreover, the international sales are expected to remain profitable, due to the conflicts around the world.

The P/E relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Jim Simons (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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