Lockheed Martin is the world's largest military weapons maker and is an important supplier to NASA and other non-defense government agencies. A bit more than 60% of sales come from the Department of Defense, 21% from other U.S. government agencies, and 18% from international customers.
Lockheed Martins CEO Marillyn Hewson has a vast experience in the company, having occupied 18 frontline positions in the company, with about 30 years of experience, which means she has experience to lead the company and understands its history and culture.
For the next three years, the top defense contractor plans to reduce diluted share count to under 300 million. This implies a repurchase of 32 million shares after including share-based compensation.
In the past five years, the company has repurchased 104 million shares. Moreover, it will likely continue to raise dividends annually, $2 billion per year is the idea. 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 2.90%, which can improve in the future allowing higher shareholders returns.
Going forward, I think that the company will benefit from more conflicts in the world. We are positive on commercial aerospace and neutral on defense for the next 12 months.
Last but not least, the company agreed to acquire military aircraft maker Sikorsky from United Technologies Corp. (UTX, Financial) for over $8B, Reuters reports, and said it may separate its government information-technology and technical services businesses. This deal is the largest after its $10B takeover of Martin Marietta two decades ago. Sikorsky has more than 15,000 employees and net sales of $7.5B at the end of last year. Although it is now subject to regulatory approval, antitrust objections are not expected.
Revenues, Margins and Profitability
Despite negative revenue growth of 5%, earnings per share increased in the first quarter when compared to the same quarter a year ago ($2.74 vs $2.87). During the past fiscal year, the firm increased its bottom line. It earned $11.21 versus $9.04 in the previous year. This year, Wall Street expects an improvement in earnings ($11.25 versus $11.21).
Finally, lets 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.
The Boeing Company
Northrop Grumman Corporation
The company has a tremendous current ROE of 86.33% 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.
In terms of valuation, the stock sells at a trailing P/E of 18.2x, which is close to 1-year low of 16.52 and trades at a discount compared to an average of 21.6x for the industry. To use another metric, its price-to-book ratio of 18.04x indicates a premium versus the industry average of 2.09x and is close to 1-year high of 19.37, while the price-to-sales ratio of 1.43x is above the industry average of 1.14x and is close to 10-year high of 1.45.
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 $31,449, which represents a 25.8% compound annual growth rate (CAGR).
Hedge Funds Holdings
I always like to see which hedge funds have long positions in the stock. Jean-Marie Eveillards First Eagle Investment (Trades, Portfolio) Management held 2.72 million shares at the end of the first quarter. The value of the stake amounted to $552.7 million. The stock gained 5.4% in that period, the guru has increased the stake by 1%. Another prominent investor in the stock is Steven Cohen (Trades, Portfolio), which upped his stake by 57% to 85,200 shares, valued at $17.3 million, held as of the end of the first quarter of 2015. In the second quarter, Manning & Napier Advisors, Inc increased its position by 33.53% to 49,143 shares, while Ken Fisher (Trades, Portfolio) reduced his position by 9.63%.
As outlined in the article, the company is a market leader and in the Aeronautics segment is a leader provider of information to the government. I am confident about latest news will bring significant long-term growth opportunity driven by the acquisition of the maker of Blackhawk Helicopters.
Finally, the PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this dividend stock, yielding almost 3%.
Disclosure: Omar Venerio holds no position in any stocks mentioned