Lockheed Martin (NYSE:LMT) posted its first quarter results on the 18th of April before the opening bell. At the time of writing, shares have crossed the $500 level several dollars short of the price target I recently set for Lockheed Martin stock.
Lockheed Martin Q1 2023 Results: Not Exciting, Not Bad
A major item to wrap your head around is the fact that the demand environment for defense equipment and services is strong, but that's not going to result in increased sales from one day to the other. The evaluation and procurement processes are long with many milestones to be cleared before a sale is recovered or even a purchase agreement is drafted. So, the positive demand environment we see today is not something that translates into sales any time soon. 2024 is in fact the earliest point where defense contractors see this happening. On top of that, driven by some program-specific pressures and global supply chain issues, sales are flattish while the demand environment is strong. Total sales were up 1% to $15.126 billion. Interesting to keep in mind is that book-to-bill was 0.7x which confirms that an improving defense environment is not resulting in a big addition to the backlog. As mentioned there's a timeline for contracts to be added to the backlog, so that materialization is not immediate or near term.
The aeronautics department saw revenues decline by 2% or $132 million driven by lower F-35 deliveries presenting a $335 million revenue pressure. This was partially offset by classified programs and F-16 deliveries and sustainment. Year-over-year, profits dropped by $4 million driven by higher F-16 activity being offset by production adjustment with total catch-up adjustments being $15 million lower year-over-year. In Aeronautics, we're seeing some volume friction of the F-35 program affecting the department top line, but on the bottom line lower revenues were absorbed by better contract mix resulting in a 0.2 percentage point margin expansion.
The Missile and Fire Control segment experienced a 3% or $64 million decline driven by $85 million in lower sensor sales and support as well as $60 million lower net sales for due to lower Guided Multiple Launch Rocket Systems partially offset by higher PAC-3 profit adjustments. More or less the same elements kept the margins more or less stable on 15.8%.
Rotary and Mission Systems revenues decreased by $42 million or 1% driven by lower Black Hawk sales valued $75 million and $60 million for services but partially offset by higher Aegis and TPY-4 integrated warfare systems and sensors. RMS saw margins contract to 10% from 11.4% driven the lower Black Hawk program volumes.
The only segment that saw growth in sales was Space with a $400 million or 16% increase in sales. This was driven by $185 million by the Next Generation Interceptor program and $170 million in classified programs and higher commercial civil space program volume and geosynchronous satellites profit adjustments. The margins contracted slightly from 9.7% to 9.5% which was driven by profit from national space security programs offset by lower launch volume in the United Launch Alliance investment.
Lockheed Martin did not have a bad year, but what was evident was how volumes impact revenues and profits of the programs, rendering the company unable to increase sales due to supply chain issues.
2023: A Flat To Lower Transitory Year
The guidance that Lockheed Martin provided for the year does not come as a surprise as it is a confirmation of the outlook provided in January. 2023 is seen as a flattish year as the company aims to transition to growth in 2024-2025. The sales outlook of $65 billion to $66 billion shows exactly that. The range of $7,225 million to $7,355 million in segment profits indicates lower profits in 2023. On the positive side, the guidance of >$6.2 billion indicates free cash flow growth.
Roughly $4 billion worth of stock will be repurchased, which should bring down the share count by approximately 9 million shares or 3%. With the current dividend that would indicate that roughly $7.1 billion will be returned to shareholders, exceeding the free cash flow. Returning more to shareholders than generated free cash flow is not something I'm particularly impressed with. The EPS will be in the $26.60 to $26.90 range, which will be down from $27.23 in 2022. So, what we're seeing is that the decline in segment earnings cannot be offset by the current share repurchase plans. The dividend and repurchase yield is around 5%-6% which I think is quite nice for shareholders.
Is LMT Stock A Buy?
Looking at first quarter results, there actually wasn’t a lot to be excited about. We see some growth in some areas, but it's offset or partially offset by declines or adjustments in other areas and I think that really tells the tale for Lockheed Martin this year and into the next. Supply chain issues are still there, but they should be easing somewhat and what we're left with is a company that's transitioning toward some value drivers such as the Next Generation Interceptor and CH-53K with some positive prospects for the F-16 as well as international F-35 sales while US F-35 sales likely will remain underwhelming.
Valuation Lockheed Martin Market Capitalization [$ bn] $ 127.9 Total debt [$ bn] $ 15.6 Cash and equivalents [$ bn] $ 2.4 Total Enterprise Value [$ bn] $ 141.1 EBITDA Forward [$ bn] $ 9.8 EV/EBITDA 14.4x Current price $ 502.56 Price target $ 523.69 Upside 4% Price target after buy backs $ 543.07 Upside after buybacks 8%
During the Q4 2022 results release I put a price target of $508.75 for Lockheed Martin stock which would provide 14% upside. Since then, share prices have gained 11%, so the share price appreciation has gone quite fast. I have updated my stock price target for Lockheed Martin using the most recent data and based and using a 15x EV/EBITDA multiple I expect 4% upside and 8% upside when incorporating share buybacks although this would put the EV/EBITDA multiple beyond the 15x that I believe Lockheed Martin should be trading on.
Conclusion: Upside Remains For Lockheed Martin Stock
Looking at all parts of the picture, Lockheed Martin is in an interesting position. The results are not extremely exciting due to the transitory phase of the company and some of its programs, but we do see the opportunity despite a tough year in 2022 and continued challenges in 2023 and possibly into 2024. Either way, we see continued shareholder returns and free cash flow growth, and based on an assessment of the EV/EBITDA multiple, I continue to see an upside that does not yet include higher defense equipment demand translating into sales. With that in mind, I maintain my buy rating for the stock with a high end price target of $543.
