Lockheed Martin (LMT, Financial) reported earnings results earlier this week that once again topped the predictions of Wall Street analysts. The company hasn’t missed top-line estimates since the third quarter of 2017 or bottom-line estimates since the fourth quarter of 2018.
Lockheed Martin also raised its earnings guidance for the year during a time that has been extremely difficult for many companies to even offer guidance. Shares are down less than 1% for the year, but the stock trades at a discount to its five-year average multiple, so I think now could be an excellent time for investors to add Lockheed Martin to their portfolio.
Second quarter highlights
Lockheed Martin, the world’s largest defense contractor, reported its second quarter earnings results on July 21. Revenue improved 12.4% year-over-year to $16.2 billion, more than $1 billion above Wall Street analysts’ expectations. Earnings per share increased 79 cents, or 16%, to $5.79, which was10 cents ahead of estimates. This included a 34 cent non-cash impairment charge related an international joint venture.
Each business segment within the company demonstrated year-over-year growth. Aeronautics led the way with $6.5 billion in sales, a 17% improvement from the previous year. Volumes for the F-35 were the primary driver of growth as they have been for quite some time. The program saw an increase in production, development and sustainment contracts. For the quarter, operating margins for this segment increased 70 basis points to 11.4%. The back log increased 1% to $56 billion.
Passed by the Senate on Thursday, the National Defense Authorization Act provided for $9.1 billion in the fiscal 2021 budget to buy 91 F-35 fighters. This was 14 more than requested by the Pentagon.
Sales for Missiles & Fire Control improved 16% to $2.8 billion. This segment saw increased demand for the company’s integrated air and missile defense programs. Volumes for the Patriot Advanced Capability-3 and Terminal High Altitude Area Defense were higher than the previous year. Lockheed missile systems also saw increased demand. Operating margins for this segment were lower by 40 basis points to 13.2%, mostly due to a decrease in sensors and global sustainment programs. This segment’s backlog totaled $31.1 billion, a 20% improvement from the previous year.
Rotary & Missions Systems grew 7% to $4 billion. Increased orders for Lockheed Martin’s Sikorsky helicopter program drove growth. This segment’s anti-submarine helicopter enjoyed higher volumes. Operating margins expanded 140 basis points to 10.6%, primarily due to training and logistics solutions programs and higher volumes for Sikorsky helicopter programs. The backlog was higher by 8.4% to $37.2 billion.
Space sales were higher by 6% to $2.9 billion due to higher sales for government satellite programs. This segment also benefited from higher sales for strategic and missile defense programs, especially in the hypersonic development programs. Operating margins decreased 190 basis points to 8.8% due to retired programs. The backlog for the Space segment declined 8.4% to $25.9 billion.
Lockheed Martin ended the quarter with more than $150 billion in its backlog, a 4.4% increase from the same quarter a year ago. Based on sales for 2019, it would take the company two and a half years to work off its backlog. This also marks the eighth consecutive quarter of an increase in backlog.
Lockheed Martin returned $930 million of capital to shareholders during the quarter, paying out $671 million in dividends and repurchasing $259 million worth of stock. This combined capital return accounted for just over 50% of free cash flow for the quarter.
The balance sheet was well positioned as of the end of June. Total current assets were $19.6 billion, including $2.9 billion of cash and equivalents compared to current liabilities of $14.9 billion. While the company does have $12.2 billion of long-term debt, near-term debt maturities are just $500 million.
The company also provided revised guidance for 2020. EPS estimates have been raised to a range of $23.75 to $24.05 from the previous range of $23.65 to $23.95. Achieving the midpoint of this estimate would be a 9% increase from the prior year. Sales are expected to be between $63.5 billion to $65 billion, up from $62.3 billion to $64 billion previously. The midpoint of this guidance represents a 7.4% improvement from 2019. Lockheed Martin now expects higher sales and profits for its Aeronautics and Space segments for the year.
Valuation
Lockheed Martin delivered higher revenue and EPS than the market was anticipating. Each segment grew sales during the quarter, led by its largest and most important segment, Aeronautics. The company’s backlog is massive and continues to grow.
Shares trade at just 16.2 times this year’s EPS estimates. This is below the stock’s five-year average price-earnings ratio of 19.4, but slightly above the 10-year average price-earnings ratio of 15.5.
As I’ve written previously, I believe the stock deserves to trade with a multiple of 17 to 19 times EPS due to the company’s positioning as the largest defense contractor in the world and the success of its business units.
As an added bonus, Lockheed Martin pays a 2.5% dividend. The company has increased its payments to shareholders for the past 17 years and has compounded its dividend by 13% annually over the last decade.
Therefore, I still find Lockheed Martin to be undervalued and feel that the stock can be bought at the current price.
Author disclosure: the author is long Lockheed Martin
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