Is Lockheed Martin Stock A Buy Or Sell? (NYSE:LMT) (2024)

Elevator Pitch

I assign a Bullish rating to Lockheed Martin Corporation (NYSE:LMT).

Lockheed Martin's shares are roughly flat year-to-date and also under-performed the major stock indices, thanks to a significant one-off charge in Q2, disappointing FY 2021 guidance, and greater regulatory oversight for M&As.

LMT stock is undervalued, with its forward EV/EBITDA and P/E valuations being the lowest among its peers despite boasting the highest forward ROAs (Return on Assets). Also, LMT is a good long-term stock, as it has an impressive track record of consistent revenue growth and profitability.

Lockheed Martin stock is a buy; its current valuations are attractive on a historical and peer comparison basis, and its future revenue growth is supported by national defense needs.

Company Description

Lockheed Martin Corporation refers to itself as "a global security and aerospace company" which is "engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services" in the company's media releases. Business magazine Fortune calls LMT "the world’s largest defense contractor." The U.S. government is the company's most important client accounting for close to three-quarters of its sales last year.

A Brief Description Of Lockheed Martin's Four Key Business Segments

Source: LMT's Corporate Factsheet

The Aeronautics, Missiles & Fire Control, Rotary & Mission Systems, and Space business segments contributed 40%, 17%, 25% and 18% of Lockheed Martin Corporation's FY 2020 revenue, respectively. With regards to earnings contribution by segment, LMT derived 40%, 21%, 23% and 16% of its operating profit from the Aeronautics, Missiles & Fire Control, Rotary & Mission Systems, and Space businesses, respectively in the most recent fiscal year.

LMT Stock Price

LMT's year-to-date stock price performance has been disappointing, as Lockheed Martin Corporation's shares are only up marginally by +0.7% in the first eight months of 2021. In comparison, the major stock indices, namely the S&P 500, the NASDAQ Composite, and the Dow Jones Industrial Average rose by +19.3%, +15.9% and +15.5%, respectively in 2021 year-to-date.

There are several factors that could have been responsible for Lockheed Martin's lackluster share price performance on both an absolute and relative basis this year thus far.

Firstly, Lockheed Martin's Q2 2021 earnings per share of $6.52 did not beat market expectations (only just in-line). At the company's Q2 2021 results briefing on July 26, 2021, LMT disclosed that its Q2 2021 bottom line was negatively impacted "by a one-time charge associated with the classified program in our Aeronautics business area" that was roughly equivalent to a -$0.61 per share hit to net profit after tax.

As this is a classified program, Lockheed Martin is unable to disclose the nature of the issue which led to the one-off charge, which makes it challenging for investors to assess if this will affect the financial performance of the company in future quarters. Therefore, it was no surprise that Lockheed Martin's stock price declined by -3.3% from $380.77 as of July 23, 2021 to $368.05 as of July 26, 2021; the company reported Q2 2021 results on July 26, 2021 before trading hours.

Secondly, LMT's full-year FY 2021 guidance announced during its Q2 2021 earnings release was not encouraging, and things got worse with a subsequent downward revision. On July 26, 2021, Lockheed Martin guided for FY 2021 revenue of $68 billion (mid-point of guidance), which was -0.5% lower than the Wall Street analysts' expectations of $68.34 billion in sales this year. Similarly, the mid-point of LMT's FY 2021 earnings per share guidance of $26.55 came in lower than the market consensus' forecasted earnings per share of $26.64 in 2021.

On August 3, 2021, Lockheed Martin updated its FY 2021 guidance and reduced its expected full-year GAAP earnings per share to $22.10 (mid-point of guidance), which it attributed to "the accelerated recognition of actuarial losses for" certain pension plans. Following this update, LMT's share price decreased by -2.1% from $369.45 as of August 3, 2021 to $361.64 as of August 4, 2021.

Thirdly, Lockheed Martin's proposed acquisition of Aerojet Rocketdyne Holdings, Inc (AJRD) might not be able to obtain the relevant regulatory approvals to be completed. LMT announced in December 2020 that it proposed to acquire Aerojet Rocketdyne, which is referred to as " a world-recognized aerospace and defense rocket engine manufacturer", to maintain its "national leadership in space and hypersonic technology."

On August 12, 2021, Bloomberg reported that "the head of the Federal Trade Commission said antitrust enforcers should more frequently move to block mergers that threaten competition" which it believes "may weigh on a major acquisition by defense giant Lockheed Martin Corp." This implies that it might be more challenging for LMT to grow via mergers & acquisitions in the future, considering the increased regulatory oversight.

Of course, Lockheed Martin's sluggish share price performance in 2021 year-to-date does not necessarily mean that its shares are undervalued, which is a topic that I go into more detail in the subsequent section.

Is LMT Stock Overvalued?

LMT stock is undervalued, rather than overvalued.

Based on its last traded share price of $357.35 as of August 23, 2021, Lockheed Martin Corporation trades at consensus forward FY 2021 and FY 2022 normalized P/E multiples of 13.3 times and 12.7 times, respectively. The stock is also valued by the market at 10.1 times consensus forward FY 2021 EV/EBITDA and 9.5 times consensus forward FY 2022 EV/EBITDA.

Lockheed Martin's current valuations are below its historical averages. As a reference, the stock's five-year mean consensus forward next twelve months' P/E and EV/EBITDA multiples were 17.8 times and 12.0 times, respectively. LMT's valuations are also attractive compared to its peers, as per the peer valuation comparison table below.

Lockheed Martin's Peer Valuation Comparison

Source: S&P Capital IQ

LMT's P/E and EV/EBITDA valuations are the lowest in the peer group, despite the fact that its forecasted ROAs (Return on Assets) are the highest among peers and its expected revenue growth rates are on par with that of its peers. Wall Street sees Lockheed Martin's revenue expanding by +4.5% and +3.9% in FY 2021 and FY 2022, respectively. The company is also expected to deliver ROAs of 14.2% and 13.7% for the current fiscal year and the next fiscal year, respectively.

As such, it is reasonable to conclude that Lockheed Martin's shares are undervalued to a large degree.

Is LMT A Good Long-Term Stock?

I think LMT is a good long-term stock for investors, notwithstanding near-term headwinds and negatives highlighted earlier in this article.

Specifically, I like Lockheed Martin for its revenue predictability and its competitive advantages, which are validated by its historical financial numbers. In the past two decades, LMT has increased its annual revenue in 16 of the last 20 years, according to S&P Capital IQ data. More significantly, in the four years (2001, 2008, 2013 and 2014) which Lockheed Martin experienced the negative top line growth, there was only a single year for which the company's YoY sales decline exceeded -5%. LMT's historical 20-year revenue CAGR is a decent +5.1%. Moreover, Lockheed Martin has been profitable in every single year for the last 20 years, with its yearly ROA averaging a respectable 8.0% in the past decade.

As mentioned in the preceding section, LMT is expected to maintain decent revenue growth rates and its relatively good ROAs (as compared with peers) for the next two years, and this is very likely to be sustained in the medium and long term as well.

I had noted earlier in the article that the U.S. government, more specifically, the Department of Defense, is LMT's key customer. Defense spending is largely non-discretionary in nature and not correlated with the health of the economy or the status of the fight against COVID-19. Notably, a significant 11% of federal spending, or $725 billion, was allocated to national defense in 2020. This explains why Lockheed Martin has been to achieve positive top line expansion historically across economic cycles.

Also, Lockheed Martin has certain competitive advantages that enable the company to generate higher ROAs than its competitors.

Firstly, switching costs are high as an inferior defense product could lead to serious national security issues, and LMT's status as the largest defense contractor and years of working relationships with the U.S. government make it a preferred supplier. Secondly, defense projects require a significant amount of capital to be committed for years, and there are not that many defense contractors that have the financial capacity (or a sufficiently large revenue base to cover fixed costs) to handle such projects. Thirdly, it is difficult or almost impossible for new entrants to enter the defense industry, as incumbents own significant intangible assets that act as barriers to entry. For example, Lockheed Martin highlighted in its FY 2020 10-K filing that it has "a substantial number of U.S. and foreign patents and trademarks related to the products and services we provide."

Is Lockheed Martin Stock A Buy, Sell, Or Hold?

I view Lockheed Martin's stock as a buy.

The company's historical revenue growth has been relatively consistent and stable, and I expect this to be sustained in the future given the largely non-discretionary nature of defense spending. Also, LMT should retain its status as the largest defense contractor globally in the future, as the industry's barriers to entry are high and the company has an edge over its smaller rivals & new entrants as highlighted above. More importantly, Lockheed Martin's shares are relatively inexpensive now, based on forward P/E and EV/EBITDA multiples.

The key risk factors for Lockheed Martin are execution issues relating to current & future defense projects, a reduction in defense spending in the future assuming changes in political leadership in the medium term, and future acquisitions becoming more challenging due to greater regulatory oversight over such transactions in terms of anti-trust issues.