With the S&P 500 index trading at a P/E of 40.0, the broader market valuations look stretched. While the market outlook remains bullish, an intermediate correction seems likely. From a portfolio perspective, it makes sense to have exposure to fundamentally strong stocks with a low beta.
Lockheed Martin (LMT) is a quality name that’s trading at an attractive valuation, has a healthy dividend pay-out, and is a low beta stock (0.94). LMT stock has underperformed in the last year, but that could change soon.
A good example is JPMorgan Chase (JPM). JPM stock underperformed for the greater part of FY2020, primarily due to the negative impact of the pandemic. However, in the last four months, the banking stock has delivered 40% returns.
Lockheed Martin trades at an attractive P/E of 12.8, and it would not be surprising if the stock outperforms the S&P 500 in the coming quarters. In addition to potential capital gains, LMT stock has an annualized dividend pay-out of $10.40, which is sustainable. What’s more, it boasts a yield of 3.0%.
Strong Order Backlog Provides Cash Flow Visibility
It’s worth noting that Lockheed Martin has continued to deliver strong quarterly numbers, even as the stock price moves sideways to lower.
The company’s order backlog has also continued to swell. LMT closed out FY2020 with an order backlog of $147 billion, $3.2 billion higher than the levels seen in FY2019. With the company reporting $65.4 billion in sales for FY2020, the order backlog provides two years of revenue and cash flow visibility.
For the current year, the company has guided for revenue of $67.8 billion (mid-range of guidance) and an operating cash flow of $8.3 billion. With strong cash flows, shareholder value creation will continue in the form of dividends and share repurchases.
Order Backlog Growth Triggers
It’s very likely that Lockheed Martin will continue to see strong backlog growth, which will translate to top-line and earnings growth. There are several factors that back this view.
In December 2020, the company announced the acquisition of Aerojet Rocketdyne (AJRD). The acquisition is likely to help Lockheed in accelerating its space and hypersonics program. Furthermore, the company also acquired Integration Innovation’s hypersonics portfolio in October 2020. Lockheed Martin’s space segment backlog was $25.1 billion in FY2020, compared to $28.2 billion in FY2019. Most likely, the acquisitions will help in boosting the segment backlog.
When it comes to inorganic growth, Lockheed reported operating cash flow of $8.1 billion and free cash flow of $6.1 billion for FY2020. Besides dividends and share repurchases, the cash buffer gives the company ample flexibility to pursue opportunistic acquisitions.
Another growth trigger for the company is international sales. For FY2020, 25% of the company’s net sales were from international customers. The company intends to focus on increasing international sales in the coming years. In particular, F-35 aircraft sales to U.S. allies and other partner countries can boost the company’s backlog.
It should be noted that most U.S. allies still fall short of the defense spending target, which is 2% of GDP. FY2020 was the sixth consecutive year of higher defense spending by European allies and Canada. With this trend likely to continue, Lockheed Martin is well positioned to further improve on its record backlog.
Wall Street Analysts Weigh In
Turning to the analyst community, 4 Buys and 3 Holds add up to a Moderate Buy consensus rating. Based on the $406.43 average analyst price target, shares could surge 20% in the year ahead. (See Lockheed Martin stock analysis)
Final Take on Lockheed Martin Stock
A popular investment strategy is sector rotation. The defense sector has been out of favor even as fundamentals remain strong, and considering the valuations, the sector is likely to regain market attention.
Lockheed Martin stock is therefore well positioned to trend higher from current levels. The company has delivered strong numbers and the fundamental outlook is bright. The dividend adds to the attractiveness, and it would not be surprising to see the stock move 30% to 40% higher in the next 6-12 months.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.