Lockheed Martin (NYSE: LMT) a security and aerospace company engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. It operates through four segments: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space.
Fundamentals: The company is slowly growing its sales over the last decade. A 41% growth rate equates to ~3% annual sales growth. The company’s sales growing steadily with the growth of defense spending. Growth is mainly organic, as even when the company tries to acquire competitors, it finds itself fighting with the FTC which forced it to forfeit. Going forward, the consensus of analysts, as seen on Seeking Alpha, expects Lockheed Martin to keep growing sales at an annual rate of ~2% in the medium term.
The EPS (Earnings Per Share) has been growing at a much faster pace over the past decade. EPS growth was fueled by top-line growth together with buybacks and improved margins. Over the past decade, operating margins have increased by 33%. The company is reworking its business plan for the next five years and is working on improving EPS growth. Going forward, the consensus of analysts, expects Lockheed Martin to keep growing EPS at an annual rate of ~2% in the medium term.
Lockheed Martin is on its path to becoming a dividend aristocrat. The company’s next dividend increase in December will be the 20th increase in a row. Lockheed Martin is paying a 2.3% yield with the payout being safe below 50%. Investors should take into account that due to the slower forecasted growth rate, the dividend increases in the medium term may be below the 10% average over the last decade.
The number of shares outstanding has declined by 16% over the past decade. Lockheed Martin is constantly supplementing its dividend payments with buybacks. Buybacks support the share price, and they support EPS growth. As long as the company can fund organic growth and dividends, appreciate excess capital allocated for buybacks.
Valuation: The company’s current P/E (Price to Earnings) ratio is 17.5 when taking into account the 2022 earnings forecast. The current valuation is the highest valuation over the last twelve months. It doesn’t fit the current forecasted growth rate that stands at 2% annually. However, it does fir the expectations for improved guidance due to higher demand as the geopolitical tensions get higher.
Opportunities: The first opportunity for Lockheed Martin is increased defense spending by NATO members. Germany has already announced that it plans to spend €100B ($108B) on modernizing its armed forces. Germany already showed interest in Lockheed Martin’s F-35. Germany also intends to increase its annual defense spending and other NATO members will follow increasing the demand for Lockheed Martin’s prominent planes and other products.
The F-35 is not the only product that may see increased demand. For example, one of the most notable weapons given to Ukraine was the Javelin anti-tank missile. The Ukrainians use this missile to make significant damage to Russian armor. It is very plausible that due to its significant success we will see other NATO members, especially in the eastern flank, purchasing more Javelins. Countries like Poland, Lithuania, Latvia, and Estonia all have borders with Russia and may consider rearmament.
The company is ready for the macro challenges ahead. The company’s balance sheet is in very good shape. The company’s debt to EBITDA has declined by 40% over the last five years and it now stands at 1.2. A flexible balance sheet means fewer interest payments when interest rates climb, it also means that it has more flexibility in dealing with inflation as it can lower prices to compete.
Lockheed Martin Long (Buy) Enter at: 472.45 T.P_1: 480.48 T.P_2: 495.93 T.P_3: 505.13 T.P_4: 520.40 S.L: 442.79
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