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Jul 13, 2021
[5 min Read]
Long story short, LMT is a $600 stock that is wrongly trading at $380. The simple investment thesis is "you can only fire a bullet once."
Lockheed Martin is aerospace and defense company which provides high-end military equipment. Aircraft is where they particularly shine with the F-35 accounting for about 30% of the company's revenue.
The lion's share of the company's revenue comes the united states government. Most of all aircraft used by the USAF comes from this one company.
Lockheed recently announced 2020 a new CEO in 2020 to run the company. His name is Jim Taiclet. While having several years of experience with Lockheed, his previous experience as CEO was not with another defense company.
Most of his career was spent running the successful REIT known as American Tower (AMT). The company has been very successful both during and after his tenure. (Which is another great dividend growth company which shows his experience returning capital and his dedication to increasing shareholder value).
DIVIDEND HISTORY/SAHRE BUYBACKS
2020 - $2.60
2019 - $2.40
2018 - $2.20
2017 - $2.00
2016 - $1.82
2015 - $1.65
Dividend Yield = 2.68%
Payout Ratio = ~40% (Very Safe)
Let me start be saying that this company is EXTREMELY profitable. The company is currently on an 18 year consecutive dividend streak. Not to mention the company buys back BILLIONS of its own stock year in and year out, with the share count having decreased by 50% since 2009. I fully expect this company to be a dividend aristocrat in a few years.
The dividend yield is about double that of the S&P as of today and only has a Payout Ratio of about 40%. This means that not only does this company have a good yield while buying back stock, but this company can EASILY afford to maintain and RAISE the dividend over time dramatically.
MERGERS & ACQUISITIONS
The company has a long history of M&A activity and the most recent example of this Aerojet Rocketdyne (AJRD). This is yet another example of the company using its financial fortress of a balance sheet and exemplary cash flows to acquire other businesses.
AJRD is a space and aeronautics company which could potentially extend more deals with NASA and the U.S. government. This was recently announced about six months ago in December 2020 and is likely to finalize in 2021.
The company has incredible financials. The balance sheet is a financial fortress. The debt load is very controllable. Cash flows continue to pour in record numbers year after year and 2021 guidance issued by the company expects record revenue and record EPS for the year.
The Biden administration just issued an increase in defense spending of about ~1% earlier this year. All the more reason for this company's financials to continue to stay healthy. Financials linked below....
GROWTH STORY MOVING FORWARD
LMT is expected to grow top-line revenue numbers 4.50% in 2021 and 3.70% in 2022. Earnings per share for the company in 2020 finished at $24.58. This is expected to grow to $26.68 in 2021 and $27.90 in 2022.
Contracts are usually signed many years in advance. Revenues can be easily forecasted for the next several years due to the timelines of the contracts. Furthermore, innovation is not only encouraged, but expected by shareholders AND the united states military is order for our nation to maintain relevant in terms of weaponry.
New age military equipment is usually pretty "hush-hush" on what is in the works but Lockheed Martin does disclose some of these new products including technologies such as new highly intelligent drones, missile systems, and even targeted lasers.
One thing is for sure, the military will continue come out with bigger and more powerful weapons as time goes on. Who will likely be selling it to them? Probably good ole LMT.
Newer acquisitions such as the recent AJRD deal allows Lockheed to also focus on other products in the space category and is another wildcard with some potential.
COMPETITIVE ADVANTAGE/ BARRIER TO ENTRY
The regulations are incredibly strict. The demand for capital is VERY HIGH with projects frequently running into the billions of dollars. Switching from one business to another poses risks for the government and our military and are usually avoided.
This makes the U.S. government very loyal and sticky to LMT business and this is very likely to continue. While there are competitors in the space....Lockheed continues to dominate this market.
VALUATION (WHY IT'S A GREAT BUY IMO)
As mentioned earlier, the company is expected to produce $27.90 in EPS in 2022. Based of of today's price of $390, this gives this company a forward PE ratio of ~13.9. This is an EXTREMELY low forward PE ratio for a company putting up record numbers and dominating the market that it operates in.
This is even more impressive considering it's still off a fair amount from it's previous all time highs. I am very bullish and this is one of my largest positions. I am not remotely interested in selling. I am buying at these prices or really anything even close to these levels. I wouldn't sell a share if this company were to go to $800 a share tomorrow morning.
RISK FACTORS TO CONSIDER
Almost all revenue comes from one customer (the government). It is steady and consistent but if the government were to fall out of love with Lockheed then this company would be negatively impacted.
There aren't many who could take down LMTs throne but their main competitor is Boeing. Boeing has the capital and leverage to compete with Lockheed Martin long term.
This company is susceptible to a number of different geopolitical risks. Conflicts with other countries could be both a Negative AND a positive for Lockheed.
The current political climate is leaning harder and harder towards a more relaxed defense budget.