*** Disclosure: I’m long the stock, but it’s a fairly insignificant position around 1% of my total portfolio. Notwithstanding what you’re about to read is incredibly biased***
1. Is the company undervalued?
EV/EBIT: 11.57
Price/Sales: 1.47
Price/Cash Flow: 14.63
$LMT trades at a significant discount to its historical multiple. Moreover Lockheed offers investors good margins, which have been remarkably consistent and modest revenue growth. Finally $LMT is throwing off an extremely generous shareholder yield, which makes the stock an enticing risk adjusted bet.
2. Can I easily explain what the company does?
Yes, they make bombs and jets.
3. Does the cash flow statement line up with income statement?
Yes, for the most part cashflows have been higher than reported earnings:
Most of this excess cashflow went toward dividends paid out, capital expenditures, and share repurchases. Music to my ears as a shareholder!
4. Is the Balance Sheet Healthy?
Total Debt: $12.17B
Total Cash: $2.76B
Current Ratio: 1.36
Lockheed does hold some debt relative to their market cap, but have a nice cash cushion and superb free cash flow generation. Additionally $LMT is only paying $576M per year in net interest payments. While I wouldn’t consider $LMT to have a fortress balance sheet, it’s well above average and not a serious concern for shareholders.
5. How profitable is the business?
Operating Margins: 13.04%
Net Margins: 10.69%
10-yr Revenue CAGR: 3.7%
$LMT is more or less average in regards to profitability, while growing revenues at a slightly below average rate. For this reason Lockheed should be selling at a discount the market. However the S&P currently has an EV/EBIT of 27.62, while Lockheed is trading at an EV/EBIT of 11.57. In other words, $LMT is a barely below average business selling at less than half the market multiple. I don’t like to rely on relative valuations, but something has to give in this equation.
6. Is management rewarding shareholders?
You bet your ass they are! $LMT just announced a dividend increase of 7.6% to $2.80 per share and increased share repurchases by $5B! Lockheed is now paying out $3.1B to shareholders in dividends and up to $6B in share buybacks. In fairness it’s highly unlikely that shareholders receive the full $9.1B over the next 12 months. Having said that $6B seems like a conservative estimate, as Lockheed is guiding for $8.9B in operating cashflows next year. This would equate to 6.35% shareholder yield, Boomers do I have your attention yet?!?!?
7. How does the company stack up against their peers?
Lockheed’s biggest competitors are General Dynamics $GD and Raytheon $RTX
$GD Price/Sales: 1.47 $RTX Price/Sales: 2.1
EV/EBIT: 15.59 EV/EBIT: 35.59
Operating Margins: 11.06% Operating Margins: 4.61%
$RTX did have a bad last year, so perhaps their trailing data is a bit wonky. Even still if we use normalized numbers; $LMT is still the cheapest, has the best balance sheet, and returns the most capital back to shareholders. All 3 have around the same profitability metrics, but Lockheed is by far the most attractive investment.
8. What’s the counter argument?
The biggest counter argument is that the libs are going to cut funding for defense at Lockheed’s detriment.
I have no idea whether or not this will happen, but if any regulation comes it will likely be negligible at best for $LMT’s intrinsic value. Also quick aside, but please don’t let your politics influence your investment decisions.
9. Is the company unsexy, uncool, or contrarian?
$LMT has 7 analysts covering the stock with; 1 sell, 4 holds, and 2 buy ratings out. Therefore I wouldn’t consider the stock to be either consensus or contrarian. I would consider the stock to be contrarian tho, as it’s unlikely you’re gonna brag about owning a company whose products are designed to literally kill people.
10. Is there something I think the market may be missing?
$LMT is a moaty business, as the barriers for entry in the defense contracting industry are ridiculously high. A new entrant would need massive amounts of capital and a talented engineering team in order to compete. Furthermore Lockheed is deeply entrenched in lobby efforts to thwart competition and deepen their moat.
Lockheed’s moat doesn’t show up in any financial metrics, but should be accounted for when determining the company’s intrinsic value. I don’t believe Mr. Market is discounting $LMT’s moat into today’s share price, as the business performance alone would suggest a higher multiple.
Final Thoughts:
$LMT almost certainly won’t be a ten bagger, but it’s an incredibly compelling risk adjusted bet. The business has grown by 4% historically and is offering investors over 6% in shareholder yield. This alone gets you to a 10% CAGR, which isn’t bad considering everything in this market seems absurdly overvalued. Moreover Lockheed has historically traded in the 15-18 EV/EBIT multiple range. Meaning that $LMT has a 38% upside if you think the multiple re-rates to a 16 EV/EBIT.
Bringing this full circle if you assume 4% revenue growth, a 6% shareholder yield, and 3 years for the multiple to re-rate to 16X, then investors would be in for a 21.41% CAGR. Furthermore I think these assumptions are fairly conservative and would consider this to be my base case.
As mentioned previously I’ve owned $LMT since 2018, but never thought it was attractive enough to add to (thank god). I now believe the odds are stacked in favor of $LMT to delivery outsized returns and for that reason I plan on accumulating shares at/around the current valuation.
***Disclosure: The author is long the stock as of the time of this publishing. This article is intended for educational purposes only and in no way should be interpreted as investment advice.