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Company Break Down

Time to Buy Lockheed Martin?

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Lockheed Martin (LMT) is one of the worlds largest security companies. They research, design, develop, manufacture and integrate advanced technology products. Primarily a government defense contractor, 70% of LMT’s revenue comes from the US Government for which they create notable products like the F-35, F-16, and Air warfare destroyers.

A good run

LMT experienced a very strong 2016 with revenues and profits reaching new highs. This in part to their acquisition of Sikorsky Aircraft. That year they reported 47.2 billion in revenue and 5.3 billion in profits. Going into and throughout 2017 the stock experienced a strong bullish run. This thanks to a few things, a strong 2016, a market wide bull run, and political tensions with North Korea.

Political boost

The North Korea fiasco which involved illegal nuclear weapons testing, and direct threats of attack from both the US and North Korea generated considerable fear in the world. This fear of an outbreak of war significantly bolstered LMT’s share price along with other defense contractors. As a result LMT’s share price appreciated 38.50% from 2017 until early 2018 when concerns of conflict came to rest. South Korea finally agreed to develop a peace treaty in April, additionally Donald Trump met with North Korean leader Kim Jong Un and further elimited concerns of war.

Peace is bad for business

Peace is not good for business if you are a defense contractor. As such LMT’s share price began to depreciate from its peak of $361 falling 28% to $269.82. It’s here we see opportunity. LMT remains a strong business providing necessary weapons, vehicles and services to the most powerful nations in the world. Despite any concerns of international military conflict we feel that now is the perfect time to buy. Conflict will arise again and military spending under Trump looks strong, making now a great time to buy a discounted LMT.

Strong fundamentals

But we don’t just like LMT because of a “buy the dip” strategy or our rather gloomy opinion of permanent peace. We believe that, fundamentally, the company is in a strong position. With P/E and EV/EBITDA ratios at 15x and 10.64x respectively. Additionally, LMT’s current dividend yield is a considerable 3.27% with 5 year dividend growth of 11%.

Valuation

Additionally based on a comparable companies analysis we feel that LMT should trading around a multiple of 20x P/E. At this multiple LMT should be trading around $363.89/share, representing a 35% potential return from LMT’s most recent share value.

LMT is a strong business with a significant position in the defense industry. They hold strong agreements with multiple countries placing LMT is a sound financial position. Peace might not be good for defense contractors but it has provided us this fantastic opportunity.  

Check out our first report of 2019 here