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Lockheed Martin Stuck in Holding Pattern Y-o-Y; Valuation Attractive
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Lockheed Martin Stuck in Holding Pattern Y-o-Y; Valuation Attractive

Lockheed Martin Corp. (LMT) is a global security and aerospace company that is engaged in the research, design, development, manufacture, integration, and sustainment of advanced technology systems, products, and services. The majority of Lockheed Martin’s business is with the U.S. Department of Defense and U.S. federal government agencies.

Lockheed Martin’s business also comprises international government and commercial sales of products, services, and platforms. The company’s operating units are divided into four categories, including Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space Systems. The company was founded in 1961 and is headquartered in Maryland.

Shares of Lockheed Martin have had gains of about 2.4% in 2021. I am bullish on LMT stock, as the fundamentals are strong, and both the dividend yield and the valuation are attractive.

Lockheed Martin Business News

The global security and aerospace company has announced it will invest $9 Million in TC Energy Solar Plus storage generation facility in Alberta, Canada in what is expected to be the largest flow battery energy storage facility in Alberta, to assist in the region’s efforts towards sustainable clean energy.

Lockheed Martin is focusing on the 5G technology by announcing an agreement with Radisys, a company providing open telecom solutions to increase the rate of 5G capabilities into Lockheed Martin’s 5G.MIL™ Hybrid Base Station and applications in military tactical networks.

Additionally, Finland chose to buy 64 F-35A multirole stealth fighters from Lockheed, in a deal valued at $9.4 billion.

In other exciting news, Lockheed Martin, in collaboration with Nanoracks and Voyager Space, has been awarded a $160 million contract by NASA to design its Starlab commercial space station.

Third Quarter 2021 Financial Results

In Q3 2021 Lockheed Martin reported sales of $16.0 billion, lower 3.0% year-over-year compared to sales of $16.5 billion in Q3 2020. The business segment operating profit (a non-GAAP measure) was $1,850 million higher than the figure of $1,762 million in Q3 2020.

The diluted EPS declined to $2.21, whereas in the same period last year, the figure was $6.25.

Cash from operations was $1.9 billion, $57 million higher on a year-over-year basis. The most positive news was that Lockheed Martin increased share repurchase authority by $5.0 billion and quarterly dividend rate to $2.80 per share. Share repurchases are expected to continue for the next 12-18 months.

The most worrisome factor in Q3 2021 is that Lockheed Martin reported a decline in sales for all of its segments on a year-over-year basis. The largest decline was for Missiles and Fire Control, which was down 6%, followed by Space down 5%. Rotary and Mission Systems revenue fell marginally, 0.45%, and Aeronautics sales declined 2%.

On top of these disappointing results, the company revised its 2021 financial outlook, and the revision was mostly negative.

Net sales were revised to about $67,000 million down from the previous estimate of  $67,300 – $68,700 (million). The business segment operating profit was revised to about  $7,350 million compared to the previous estimate of $7,380 – $7,520 (million) and cash from operations are expected to be ≥$8,300 million whereas in the past this figure was  ≥$8,900 million.

The only exception, that is nevertheless important, was an upward revision for diluted earnings per share to about $22.45, which is higher than the previous range of $21.95 – $22.25.

From a fundamental perspective, Lockheed Martin has a debt-to-equity ratio of 1.94 for FY 2020, which may seem high, but it has been reduced a lot in FY 2019 and FY 2018. Moreover, it has declined more to 1.21 for the latest quarter. The strengthened balance sheet, the improved gross and net margin, a strong free cash flow trend, and an attractive dividend yield are positive factors.

Furthermore, the Return on Equity % trend for the past five years has been exceptional.

Lockheed Martin’s dividend history shows consistency and growth. Investors relying on a sustainable dividend as a form of income generation can select LMT stock as a prime candidate. In contrast to WallStreetBets Stocks, most of which have dim prospects and trade at lofty valuations, the LMT stock is very attractive.

Valuation: Presenting Value

LMT stock is relatively undervalued, based on its PE Ratio (16x) compared to the U.S. Aerospace & Defense industry average (19.6x).

When comparing its PE ratio to the U.S. market average (17x), Lockheed Martin seems reasonably priced.

Wall Street’s Take

Turning to Wall Street, Lockheed Martin has a Moderate Buy consensus rating based on three Buys and six Holds assigned in the past three months. The average Lockheed Martin analyst forecast of $380.67 implies a 9.7% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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