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Faisal Humayun
Faisal Humayun
Articles (678)  | Author's Website |

Lockheed Martin: Strong Growth And Shareholder Value Creation

June 25, 2014 | About:

On June 24, 2014, Lockheed Martin (NYSE:LMT) won a $1.86 billion contract from the US government for the next two SBIRS missile defence early warning satellites. This is yet another meaningful addition to the company’s strong order backlog of $82.6 billion as of 2013, which gives a two-year revenue visibility. This article discusses some of the key growth and value creation strategies that Lockheed Martin intends to implement over the next few years.

Growing International Presence

Currently, Lockheed Martin is heavily dependent on the US government for its sales and growth. As of 2013, 82% of the company’s consolidated net sales came from the US government with 61% coming from the department of defense. With the budget control act of 2011 likely to have an impact on defence spending, Lockheed Martin is aggressively looking to diversify globally.

As a part of this strategy, Lockheed Martin has made few key appointments recently for the international division. Steve O’Bryan has been appointed as the vice president, international strategy and business development as of June 24, 2014.

From the current international revenue of 17%, the company intends to boost international sales to 20% of the total revenue over the next few years. This is possible given the current order backlog bifurcation of the company. With business partnership in 70 countries and with over 1,000 global partnerships, the company’s revenue diversification strategy is likely to work.

Besides organic growth, Lockheed Martin is also embarking on inorganic growth to boost international presence. In 2013, the company acquired Amor Group, a United Kingdom-based company. This acquisition expands the company’s capabilities in information technology solutions for the energy, transport and public services sectors.

With a strong cash position and a healthy cash flow profile, Lockheed Martin is well positioned to make strategic acquisitions in international markets as well as in the local markets. On June 18, 2014, the company acquired Deposition Sciences, a provider of thin film coatings. These acquisitions are intended to have presence across the value chain of operations and hence lower the operating cost.

Improved Margin And Strong Fiscal Year 2014 Outlook

For the first quarter of 2014, Lockheed Martin increased its operating margin to 13.4% as compared to 12.1% in the first quarter of 2013 through various cost cutting measures, including workforce reduction. As a result of the margin and EPS expansion, the company has revised the EPS guidance for FY14.

The company expects EPS to be in the range of $10.5-$10.8 in FY14 as compared to an EPS of $9.13 in FY13. Considering the higher range of $10.8 as the annual EPS, the earnings growth for FY14 is likely to be 18.3%. This is robust growth and should translate into shareholder value creation.

In terms of shareholder value creation, Lockheed Martin paid $444 million in dividends for the first quarter and also repurchased shares worth $1.1 billion. This trend will continue for the year with strong projected earnings. Therefore, at a current stock price of $162.5, Lockheed Martin also offers an attractive dividend yield of 3.2%.

Attractive Valuations

With aeronautics and space being the largest revenue contributor for Lockheed Martin, a close competitor can be considered to be The Boeing Company (NYSE:BA).

On a relative basis, Lockheed Martin seems to be an attractive investment. The company is currently trading at a trailing twelve month PE of 16.8 as compared to The Boeing Company’s trailing twelve month PE of 22.3.

While both companies are fundamentally strong, I consider that Lockheed Martin has an edge in terms of attractive valuations. Even in terms of dividend yield, Lockheed Martin offers a dividend yield of 3.2% as compared to 2.2% for Boeing. Therefore, on a relative basis, the stock is a good investment.


With a strong order backlog of $82 billion, Lockheed Martin has a robust revenue visibility. I am tempted to consider the company at this point of time as the company embarks on an international growth strategy.

Lockheed Martin has strong financial resources to grow organically as well as inorganically. I therefore expect the company’s sales composition will be more diversified on a regional basis and this will also help growth sustain with some emerging markets ramping up their defence budget.

Considering the current growth strategy coupled with the fact that shareholder value creation is ongoing through dividends and share repurchase, I am bullish on Lockheed Martin for the medium to long-term.

About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with eight years of experience in equity research, credit research, economic research and financial modeling.

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