What Makes Lockheed Martin A Good Buy Right Now?

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Mar 26, 2015

Lockheed Martin (LMT, Financial) is a huge name in the aerospace & defense sector and majority of investors looking at owning a position in the sector owns Lockheed Martin shares. As of this writing the defense stock is trading at $198.18, much close to its 52-week high of $207.06. In the last one year the stock price has jumped 23.44% and in the last two years it’s improved by a whopping 105.34%. But does this mean the stock is already trading high and new investors have missed the opportunity to benefit from the company? Definitely no. Let’s understand why that is so.

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Intrinsic value and margin of safety
Before jumping in and initiating a position in any stock, it’s very important to analyze the value and the price of the stock. Several legendary investors including Warren Buffet rely strongly on the intrinsic value of any stock. This value represents the sum total of all the cash that an investor can take out in the lifetime of the company. Generally stocks that trade at prices lower than the intrinsic value are preferred since they offer margin of safety, i.e. a cushion to deal with market’s volatility. However, if market price is greater than intrinsic value, margin of safety is zero.

For calculating the intrinsic value of Lockheed Martin, we used GuruFocus’ fair value calculator and according to its output, the stock offers a margin of safety of 4% and has a fair value of $206.37. This means the stock price still hasn’t reached the value it offers and thus it’s definitely a bargain for long-term investors.

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Source: Guru Focus

Good upside potential
Intrinsic value and market prices are two very different concepts. In no way intrinsic value refers to the maximum figure that the stock can trade at. While intrinsic value takes into account future cash flows and book value, market price takes into account the dynamics of demand and supply. According to Yahoo Finance analysts, Lockheed Martin stock has the potential to hit as high as $255.0 a share, translating into a 29% gain over current price.

Things are looking up for the company and developments surrounding its Joint Strike program (JSP) looks encouraging. In a recent NASDAQ report, Teal Group analyst Richard Aboulafia mentioned, “When it [JSP] goes operational, it will capture 50% of the jet fighter market globally”. It will nearly force all other players out of the global warfare aircraft market and leave only Lockheed Martin. The market is currently being dominated by Boeing (BA, Financial), European aero major Airbus (EADSY, Financial), UK based BAE Systems Plc. and Italy’s Alenia Aermacchi, according to the NASDAQ report.

Another success factor for Lockheed Martin has been the F-35 fighter jet. Despite the shrinking defense budget, the budget for funding F-35 purchases has increased – now the US government plans to buy 57 jets in fiscal year 2016, up from the previous 38. Not only this, in total the US government plans to buy 2,400 units of the model and foreign orders are expected to add another 600 units. As demand for its offerings increase, its performance is expected to improve further and investors are likely to pay more for each unit of the stock. So, not only the stock is trading at a discount compared to its fair value, it’s also trading at a discount compared to the future expected price.

Buying now is crucial
If an investor is thinking of initiating a position or expanding position in the stock, this probably is a good time to act on it. So far the stock has grown phenomenally and future expectations are also bright. Looking at the last two year’s growth rate, it won’t be a surprise if the stock price soars further. And thus anyone not initiating a position now will further miss out from benefiting from the stock. Eighteen out of eighteen analysts are optimistic about the upside potential of the company. And why shouldn’t they be with so much going on. Lockheed Martin definitely looks like a stock worth ones time and money.