Monday morning, President-elect Donald Trump Tweeted:
After which, aerospace and defense company Lockheed Martin's (LMT, Financial) shares lost an initial $4 billion in market value, about $28 million lost per Tweet character, according to CNBC. Lockheed Martin was down 2.47% at market close.
Earnings performance
Lockheed Martin delivered its third-quarter fiscal 2016 results on Oct. 25. The $76 billion defense company reported 15.4% net sales growth to $33.5 billion and an outstanding 61.5% profit growth to $4.3 billion nine months in its fiscal 2016 business operations.
Company expenses still grew by 16% to $29.8 billion partially offsetting the good sales growth. As further observed, the other income segment grew by 60% to $412 million, which helped boost Lockheed Martin’s bottom line figure.
In its filing, most of the gains recorded in the other income segment came from the increased ownership (18%) that Lockheed Martin had in the company AWE Management Ltd. (1).
As a result of outstanding figures delivered by the company, its shares closed up 7.37% that day post-earnings announcement while the broader Standard & Poor's 500 index closed down 0.38%.
“The corporation achieved a quarter of strong operational and financial results while also completing our strategic disposition of IS&GS. Looking ahead to 2017, we are focused on providing innovative solutions to our customers while executing on our realigned business portfolio to generate growth and value to shareholders.” – Lockheed Martin Chairman, President and CEO Marillyn Hewson
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(Annual report)
Outlook
(Press release)
Lockheed Martin forecasted that it would grow its sales by approximately 0.8% while seeing its operating profit grow about 1.27%.
(Annual report)
Market performance
Lockheed Martin performed well for its shareholders year to date, returning 19.68% versus S&P 500 index’s 12.75% (2). Over the past five years, the company returned 30% versus 14.9%.
Valuations
Lockheed Martin had a trailing 12-month price-earnings (P/E) ratio of 15.5 times (industry median: 21), price-book (P/B) ratio 32.85 times (industry median: 2.1) and price-sales (P/S) ratio of 1.6 times (industry median: 1.2; 3). The defense company also has a trailing 2.61% dividend yield with a 50% payout ratio and a 1.7% share buyback ratio.
(10-Q)
Lockheed Martin
Lockheed Martin is a $76 billion American global aerospace, defense, security and advanced technologies company with worldwide interests. It was formed by the merger of Lockheed Corp. with Martin Marietta in March 1995.
Lockheed Martin’s main areas of focus are in defense, space, intelligence, homeland security and information technology including cybersecurity.
Lockheed Martin principally engages in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The company also provides a broad range of management, engineering, technical, scientific, logistics and information services.
In fiscal 2015, Lockheed Martin derived 78%, or $36 billion, of its sales from the U.S. government (58% from the Department of Defense), 21% from international customers and 1% from U.S. commercial and other customers.
(10-K and 10-Q filings)
In fiscal 2015, Lockheed Martin operated five business segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and Fire Control (MFC), Mission Systems and Training (MST) and Space Systems.
Aeronautics
Aeronautics engages businesses involving advanced military aircraft including combat and air mobility aircraft, unmanned air vehicles and related technologies (4).
According to Lockheed Martin, the F-35 program is its largest and contributed 20%, or $9.22 billion, of its total fiscal 2015 sales.
As per Aeronautics, the segment contributed 33%, or $15.6 billion, in total sales in fiscal 2015. As expected, the segment is the largest contributor to Lockheed Martin’s sales. Aeronautics grew 4.4% year on year in fiscal 2015 and delivered an operating profit margin of 10.8%. Nine months in fiscal 2016, Aeronautics grew 10.5% while delivering a 10.8% profit margin.
Information Systems & Global Solutions (IS&GS)
IS&GS provides advanced technology systems and expertise, integrated information technology solutions and management services across a broad spectrum of applications for civil, defense, intelligence and other government customers.
In fiscal 2015, IS&GS derived 89% of its sales from the U.S. government. The IS&GS segment contributed about 12%, or $5.6 million, in total Lockheed Martin fiscal 2015 sales.
Lockheed Martin mentioned that sales in IS&GS has been impacted by continued downturn in federal agencies’ information technology budgets. The segment lost 1% for the period and delivered an operating margin of 9.1%.
In a Reverse Morris Trust agreement with Leidos (LDOS, Financial) in January, IS&GS’ operations and figures were no longer included in the recent earnings filing. This agreement will be discussed in the cash flow part of this article.
Missiles and Fire Control (MFC)
MFC provides air and missile defense systems; tactical missiles and air-to-ground precision strike weapon systems; logistics; fire control systems; mission operations support, readiness, engineering support and integration services; manned and unmanned ground vehicles; and energy management solutions.
MFC derived 61%, or $4.1 billion, of its fiscal 2015 sales from its U.S. government customers. The segment lost 4.5% that year while delivering an 18.9% operating margin, highest among the Lockheed Martin segments. Nine months into fiscal 2016, MFC grew 1% year on year and delivered a 15.7% operating margin.
Mission Systems and Training (MST)
MST provides design, manufacture, service and support for a variety of military and civil helicopters; ship and submarine mission and combat systems; mission systems and sensors for rotary and fixed-wing aircraft; sea and land-based missile defense systems; radar systems; the Littoral Combat Ship (LCS); simulation and training services; and unmanned systems and technologies (5).
On Nov. 6, Lockheed Martin purchased United Technologies’ (UTX, Financial) Sikorsky business segment for $9 billion and absorbed its operations under the MST segment. MST, as of December 2015, did not include Sikorsky figures.
MST derived 77% of its fiscal 2015 sales from the U.S. government. The segment grew 4.1% to $9 billion and had an operating margin of 9.3%.
(Sikorsky Black Hawk, Lockheed Martin)
Nine months in fiscal 2016, MST grew an amazing 53% and delivered a margin of 7%, compared to 10.9% in the previous year. MST was identified as Rotary and Mission Systems (RMS) in the recent fiscal year. The amazing increase came from the addition of Sikorsky’s $3.4 billion sales figures. Without Sikorsky, the RMS segment would have lost 0.84% for the period.
Space Systems
Space Systems is engaged in the research and development, design, engineering and production of satellites, strategic and defensive missile systems and space transportation systems (6).
Space Systems derived 97%, or $8.8 billion, of its fiscal 2015 sales from the U.S. government. The segment lost 1.1% and delivered operating margin of 12.9%. For nine months in fiscal 2016, the segment lost 1.4% and had a margin of 15.6%.
Overall, Lockheed Martin had a five-year sales and profit growth averages of 0.14% and 4.26% (2).
Cash, debt and book value
As of Sept. 25, Lockheed Martin had $2.9 billion in cash and $14.3 billion in debt with a 5.9 debt-equity ratio compared to $15.3 billion debt and 4.9 debt-equity ratio in December 2015.
Cash flow
(10-Q)
Lockheed Martin grew its cash flow from operations by 19% to $4.46 billion nine months into fiscal 2016. As observed, the impressive profit growth and increased accounts payables covered and provided even more cash flow than accounted for Lockheed Martin’s negative charges in relation to the divestitures related to the company’s Information Systems & Global Solutions (IS&GS) segment and a reduction in receivables for the period.
In January, Lockheed Martin entered into an agreement divesting the IS&GS business segment with Leidos Holdings.
“This strategic transaction is an important milestone in the portfolio reshaping strategy we announced in July 2015 and allows us to focus on our core business in aerospace and defense,” said Lockheed Martin Chairman, President and CEO Marillyn Hewson.
Further, the divestiture, which would undergo a Reverse Morris Trust transaction, was expected to unlock an estimated $5 billion in enterprise value for Lockheed Martin.
(Read more of the Reverse Morris Trust)
Also, Lockheed Martin shareholders were to receive 50.5% outstanding equity of Leidos. The 50.5% was estimated to have a $3.2 valuation. Lockheed Martin also received $1.8 billion one-time special cash payment from Leidos.
Going back, capital expenditures for Lockheed Martin were at $627 million, leaving the defense company with $3.8 billion in free cash flow in the period, compared to $3.2 billion last year.
Lockheed Martin reduced its debt outstanding by $952 million for the period, while allocating 72%, or $2.8 billion, of its free cash flow in dividends and share repurchases. On average, Lockheed Martin allocated 110% of its free cash flow in dividends and buybacks in the past three fiscal years.
Conclusion
President-elect Trump's Tweet certainly did not help Lockheed Martin even though it has been a resilient multibillion-dollar aerospace and defense company in recent years.
Nonetheless, the company appeared quite prudent, through its recent arrangements, explaining why it gained good business growth despite the economic challenges it has been facing, such as government expenditure slowdown.
(U.S. Defense Spending, U.S.GovernmentSpending.com)
Also observed was how Lockheed Martin was able to provide to its shareholders almost all or even more of its free cash flow over the years.
Lockheed Martin’s earnings multiple indicated a good discount compared to its peers, but its book value multiple demonstrated a contrasting story. Book value multiple is just several times higher than its peers, accompanied by a good amount of debt that is not probably suitable with a conservative investor.
(Lockheed Martin Share Price, CNN Money)
Regardless, Lockheed Martin’s share price is playing with its 52-week highs.
In mid-November, Stifel upgraded its outlook on the company’s shares to buy while also raising its target price to $290 per share from $260. Barclays also raised its outlook on Lockheed Martin’s shares with a price target of $275.
By the company’s share price performance, it does seem that price upside is limited. Nonetheless, balance sheet figures deterred this conservative investor’s admiration of the company’s valuable business.
In summary, Lockheed Martin is a pass.
Notes
(1) 10-Q: According to Lockheed Martin, AWE Management operates United Kingdom’s nuclear deterrent program and had fiscal 2015 sales of $1.5 billion and profits of $85 million.
AWE Management figures will be under Lockheed Martin’s Space Systems segment.
(2) Morningstar data.
(3) GuruFocus data.
(4) 10-K: Aeronautics major programs include:
(5) 10-K: In addition, MST supports the needs of customers in cybersecurity and delivers communications and command and control capabilities through complex mission solutions for defense applications.
(6) 10-K: Space Systems provides network-enabled situational awareness and integrates complex global systems to help our customers gather, analyze and securely distribute critical intelligence data.
Disclosure: I do not have shares in any of the companies mentioned.
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