Lockheed Martin Corporation (NYSE: LMT), a security and aerospace company. It is the largest U.S. defense contractor. It makes products for the military and civilian sectors, including missiles, aircraft and sophisticated systems in the fields of information management, aeronautics and electronics. Almost 4/5 of its sales are to the U.S. government. It builds the F-16, F-22, F-35, C-5M and C-130 airplanes and Titan launch vehicles, as well as a range of other aerial and ground-based vehicles. It has divisions for:
2. Information Systems & Global Solutions
3. Missiles and Fire Control
4. Mission Systems and Training
5. The company dates back to 1909 and Bethesda MD is where it’s headquartered.
Acquisition of Sikorsky
In July, Lockheed Martin announced the purchase of United Technology’s Sikorsky Aircraft Division for $9B, giving it further penetration into the military helicopter market. The acquisition permits Lockheed Martin to assemble complete helicopters rather than just key components. The company said it would be able to squeeze about $150M in cost savings from the deal and will realize $1.9B in tax benefits. In its press release, Lockheed called Sikorsky a natural fit that will extend its core business. It further stated that the deal will not interfere with stock buyback plans to reduce outstanding shares from 310M to less than 300M by the end of 2017. [Source: Fidelity]
Earnings and Dividend Growth
LMT share price has increased 28.32 percent in the last 52 weeks, rising from $165.26 to $210.75 price range as of August 5, 2015 and giving it a market cap around $65B. Consensus estimates of 2015 earnings per share are $11.25, driving the P/E ratio to 18.67. Growth over the last four quarters in sales and EPS has been 3.0 and 16.1 percent, respectively.[Source: S&P Capital IQ] Shares are paying a $6.00 annual dividend, providing a 2.86 percent dividend yield compared to a 2.11 percent industry average. One-year dividend growth is 12.78 percent and the payout ratio is 53.29 percent. Beta is a fairly low 0.63.
Over the trailing twelve months (TTM), Lockheed’s margins were slightly under par compared to industry averages, with the exception of its low 13.88 percent gross margin (vs 26.19 percent industry average). Margins on profit, operations and pretax income were 7.98 percent (7.64 percent), 11.67 percent (13.91 percent) and 11.41 percent (12.25 percent), respectively.
Lockheed’s return ratios were all above industry average except for return on sales. Return on equity was triple the industry average, reflecting the leverage provided by the 73.81 percent total debt to capital ratio. Lockheed’s return on sales (TTM) was 7.93 percent (versus industry average of 8.60 percent). Return on equity was 99.45 percent (33.04 percent) and return on assets was 9.37 percent (7.20 percent. Lockheed returned 33.10 percent on investment, double the industry average of 16.22 percent.
Debt Ratios and Operating Metrics
Lockheed appears to use debt well to support high asset and inventory turnovers, although receivable turnover is below average. The TTM long-term debt/equity ratio of 198.18 percent is triple the industry average of 64.86 percent. As mentioned, the total debt to capital ratio is 73.81 percent (47.74 percent). Total debt to equity is 201.30 percent (77.66 percent) and the current ratio is 1.19 (1.51). Asset turnover is 1.18x (0.87x), inventory turnover is 13.14x (5.97x), and receivables turnover is 7.10x (7.84x).
The current P/E of 18.67 is well above its five-year average of 13.23, but this is explained by the growth in the general market over the last five years. Prices are not high when compared to TTM industry averages (with the exception of price/book). Price/cash flow is 14.23 (versus 14.06 for the industry), price/sales is 1.44 (1.61), and price/book is 18.10 as of 8/7/2015 (6.40). The $9.6B book value of Lockheed is well below the industry book value of $24.02B. Lockheed is a growth stock, not a value stock.
While the current price is certainly not cheap, we like LMT as a long-term pick for several reasons:
1. It is aggressively seeking growth, as seen by its recent purchase of Sikorsky.
2. It has a strong record of dividend growth.
3. EPS growth is strong.
4. Lockheed will be buying back 10 million shares over the next two years.
5. The balance sheet ratios look clean, and although the debt ratios are above average, Lockheed appears to manage debt well and certainly can take on additional debt to finance new acquisitions.
6. The stock’s low beta reduces overall risk.
After a strong price run-up, we wouldn’t be surprised to see the stock take a little breather for the remainder of the year. Nevertheless, long-term government contracts, technological advancements and entry into new businesses make Lockheed Martin a good candidate for share accumulation.