Lockheed Martin (LMT, Financial) is a security and aerospace company involved in the research, design, development, manufacture, integration and sustainment of advanced technology systems. The company serves both the domestic and international customers with products and services in the civil, defense and commercial segments.
The company’s prime operating segment is the aerospace and defense segment. In the segment the company manufactures some of the best and highly demanding aircrafts, ground vehicles and missile defense equipments to name a few.
Lockheed Martin can be considered as a core investment stock in a portfolio. This is primarily because the company has provided healthy returns with a great historical performance. Also, considering the company’s F-35 project with well managed operations I believe the shareholders will continue to benefit with the company being a leader in the industry.
Historical Performance
Over the past three years the company has shown a consistent increase in its operating, EBIT and Income margins. This primarily reflects the ability of Lockheed to manage its cost effectively. One such example of effective cost management is the decrease in cost of the production of F-35 by 57% from Low Rate Initial Production (LRIP) 1 to 8.
| Parameters in millions | 2013 | 2012 | 2011 |
| Revenue | 45358 | 47182 | 46499 |
| Operating Income | 4505 | 4434 | 4020 |
| Operating margin | 9.9% | 9.4% | 8.6% |
| EBIT | 4505 | 4455 | 3985 |
| EBIT margin | 9.9% | 9.4% | 8.6% |
| Net Income | 2981 | 2745 | 2655 |
| Net income margin | 6.6% | 5.8% | 5.7% |
| Cash Flow from Operating activities | 4546 | 1561 | 4253 |
| Capital expenditure | 836 | 942 | 987 |
| Free cash Flow | 3710 | 619 | 3266 |
In addition to increasing margin the company’s cash flows also looks impressive with a positive and increasing cash flows from operations and free cash flows. Positive cash flows thus assure that the company is well positioned to continue to provide good returns to its shareholder.
F-35 Catalyst For Growth
Lockheed has some of the biggest project which supports its long term prospects. F-35 is one such project which is involved in the production of 5th generation fighter aircrafts with fully fused sensor information, network-enabled operations and advanced sustainment.
This is one of its kinds which will replace some of the existing dense aircrafts of U.S along with a variety of fighters for ten other countries. The company is also on track to deliver 36 F-35 fighter jets by the end of 2014.
The delivery will result in high amount of incentive fees to the company. However, some investors must be wary of the thought that U.S has decreased its military defense spending. In spite of the decline in the country’s spending, Lockheed has been able to consistently increase its earnings. Historically, we have seen that there has always been huge demand of fighter jets over the world and in spite of US decreasing its spending;
Lockheed has enough buyers in other parts of the world primarily due to increasing geopolitical tension. I also believe that US might forego its current military defense spending and increase it in the coming years based on the current political turmoil.
Based on the increasing demand for F-35, Lockheed is expected to have 50% share of the global jet market by 2018. Such a huge shift in the market will surely have a positive impact on the company’s growth and shareholders can expect better returns.
Valuation Should Not Be A Concern
Lockheed Martin is trading at a forward EV/EBITDA of 9.9 against close peers Northrop Grumman Corporation’s (NOC, Financial) 9.3 and Raytheon Company’s (RTN, Financial) 9.5. Though the company might look slightly overvalued as compared to peers and sector’s next 12 month’s EV/EBITDA of 9.5, I believe the company is still better than peers. This is primarily because Lockheed has a very attractive dividend yield of 3.20% as compared to Northrop’s 1.90% and Raytheon’s 2.30% along with a good dividend growth track record.
Conclusion
Lockheed Martin is the leader in the defense industry and has very well managed operations. This is reflected in the company’s strong historical performance. In addition to a strong management, the company also has a great project in the pipeline that supports growth. With increasing demand of F-35 the company’s market share is expected to increase and this will surely have a positive effect on shareholder returns.
