First Cut Stock Study Report
Company Name: Lockheed Martin Ticker: LMT
Date of Study: 5/12/2021 Price: $ 387.82
Your Name: Puget Sound Chapter Directors
Email address: shauneendaniel@gmail.com
City: Seattle State: WA
Chapter Name (if applicable): Puget Sound Chapter BetterInvesting
Discuss why you consider this to be a high quality, growth company that should be investigated further. Please include comments on historical sales and EPS growth, pre-tax profit margin, return on equity, and debt.
A 3/5/2021 summary of Value Line’s description of this aerospace defense company's business is: Lockheed Martin provides a broad range of products and services to the world’s governments and commercial customers. 70% of its revenue comes from the U.S. government. Areas of concentration include space and missile systems, electronics, and aeronautics. Program base includes F-16, F-22, F35 aircraft, ballistic and other missile systems, C-130 transport, and Titan launch vehicles.
For the past five-year period (2016 -2020), LMT has growth percentages of 8.2 for sales, 29.2 for pretax profit, 14.6 for EPS, 11.2 for pretax profit on sales and 13.5 for return on equity. The debt to capital ratio at year end 2020 had decreased to 66%, and at that level is in at the high end as compared to the industry. Lockheed and is considered a very large company with revenues of 65.4 Billion in 2020.
Briefly describe how the company makes money:
LMT has four segments which are Aeronatics, Rotary and Missile Systems, Missile and Fire Control and Space. The Aeronatics segment sales are dominated by the stealth fighter jet F-35 program which has a US contract life to the year 2070 and is 30% of total company revenue.The jet has a network of more than 1,800 suppliers that have been strained during the pandemic, an ongoing situation with other segment suppliers. The Rotary and Missile segment (RMS) produce the Sikorsky helicopter which accounts for 40% of this segments revenue. Also in this segment is Marinette Marine, that integrates Lockheed missiles and it's other products into military watercraft.The Space segment includes United Launch Alliance Spacecraft (ULA) and was formed by Lockheed and Boeing as a cost saving joint venture partially in response to lower cost competitor Space X's reusable rockets which had won US Defense department contracts.
The Missile and Fire Control (MFC) segment develops, manufactures and supports advanced combat, missile, rocket, manned and unmanned systems. MFC has products and services for the global civil nuclear power industry and the military’s
This stock study reflects the judgment of the contributor(s) only and no investment recommendation is intended. Investors should always conduct their own analysis before making an investment decision. This report may reference websites, products or services not endorsed by BetterInvesting and that may require
usage fees. The preparer(s) of this report is not endorsing or promoting the use of these websites, products or services.
green power initiatives. The three biggest stock-specific growth opportunities for LMT are F-35 jet sustainment, a large potential contract for the Future Vertical Lift (FVL) program, and hypersonic aircraft, missiles and missile defense programs.
LMT announced in December 2020 an aquisistion that is under review by the FTC of the medium sized well respected aerospace and defense company Aerojet
Rocketdyne. Aerojet currently provides propulsion and energetics to space, missile defense, strategic, tactical missile and armaments customers worldwide. This aquisistion, if completed in late 2021 is expected to augment LMTcapability and increase EPS.
Since the end of the cold war, there has been considerable consolidation within this industry and LMT and it's competitors. Defense News lists top contractors in 2019 by defense revenues in millions who are Lockheed $56,606 Boeing $34,300,General Dynamics $29,512, Northrup $28,600, Rayathon $27,448, BEA Systems $21,033 and Airbus 11,227. These companies have remained the some of the top dealers for the last 15 years. These large companies have the advantage over smaller
companies that have the inability to make the substantial fixed costs to enter this market and access information that is conifidential.
Projected growth rate for sales: 5.0%
Why did you select this rate? Discuss from where future growth will come.
Future five year estimates for sales range between 5 to 7.5 percent. The five year historical average is 8.2 %. I chose 5% as company guidance on the 10K YE 2020 LMT expects "our 2021 net sales to increase in the mid-single digit range from 2020 levels. The projected growth in net sales from 2020 was driven by F-35, F-16 and classified programs at Aeronautics, increased volume within integrated air and missile defense programs at MFC, increased volume on Sikorsky helicopter (part of FVL) and training and logistics solutions programs at RMS, and hypersonics (aircraft and missiles that can fly at more than 3840 mph). Total business segment operating profit margin in 2021 is expected to be approximately 11.0%." Growth in product development will be due to Lockheeds' wide moat designation, solving problems of project complexities, extensive expertise with personnel security clearance,
classified intelligence. This growth comes at a huge expense as Lockheed and the other companies vie with each other for government decade long contracts which allow change orders that may become more lucrative as they time goes by because of greater understanding of project. Switching costs for a customer in this industry can be very costly, so for a product failure it may be more cost effective to repair rather then replace or to seek a new vendor. This cost plus contract situation provides for orginal contract regulated margins, customer-paid research and
development, long-term revenue visibility and allows the defense primes to deliver a lot of cash to shareholders.
Projected growth rate for earnings per share: 5.0%
Why did you select this rate?
EPS range forecasts are between 5 to 10 percent and the historical average for the 5 year EPS growth is 29.2 %. I choose 5% for the SSG as it is closer to the the
projected estimates using the Betterinvesting online tool preferred procedure which produced 3.3%. This estimated 5% growth for sales and 5.0% earnings reflects the decrease in speading and slower growth that may occur due to the large US debt the government has taken on during the Covid -19 pandemic.
Projected High P/E: 17.5
Why did you select this value?
At this time the high PE 5 year average (after deleting an outlier in the SSG) is 19.7.
The current PE is 15.5 and the average PE is 15.9. Over the past four years the high PE values have been decreasing so I chose 17.5. It is considered a good sign when a company's current PE is below the average PE.
Projected Low P/E: 12.1
Why did you select this value?
After deleting two outliers in the SSG, I chose 12.1 as the low PE, which is the 5 year average low PE. Over the past five years, the low PE values have been decreasing.
Projected Low Price: $330.00 Why did you select this value?
This value is close to both the 52 week low stock price and is about 20% less than the 52 week high price.
At the current price, the stock is a (check one):
Buy or Hold or Sell
At the current price, the upside-downside ratio is: 3 to 1 Compound Annual Return – Using Forecast High P/E: 11.1%
Your final recommendation (check one):
Buy or Hold or Sell Explain:
The price today is near the top of the buy range.
One of our team that helped with this report wrote, "one of my positives that I took away was Value Line's 3/5/2021 glowing take on LMT, when the stock price was $340.47.
They are usually conservative anyway, but I found that they said they couldn't find a good reason for the stock to have trailed downward. Regardless of the outcome of our study it seems like it is a solid company.
Other excerpts from analysts and literature are below;
Morning Star LMT Fair Value on 4/20/2021 was $436.00
This stock study reflects the judgment of the contributor(s) only and no investment recommendation is intended. Investors should always conduct their own analysis before making an investment decision. This report may reference websites, products or services not endorsed by BetterInvesting and that may require
usage fees. The preparer(s) of this report is not endorsing or promoting the use of these websites, products or services.
The US will still need to continue to protect the US and US allies from the tension from Russia, China and the Middle East, with surveillance and arms. But, spending may be at a lower rate affecting sales at LMT. From Morning Star 4/20/2021 about LMT Risk and Uncertainty by Burkett Huey "Defense primes are implicitly a play on the defense budget, which we think is ultimately a function of both a nation’s wealth and a nation’s perception of danger. The fiscal stimulus used to support the U.S. economy during the COVID-19 pandemic dramatically increased the U.S. debt and higher debt levels are usually a forward indicator of fiscal austerity. We expect a flattening, rather than declining, budgetary environment as we think that heightened geopolitical tensions between great powers are likely to buoy spending despite a higher debt burden. We think that contractors will be able to continue growing despite a slowing macro environment due to sizable backlogs and the national defense strategy’s increased focus on modernization, and we think that defense budget growth is likely to return to its long-term trend. We note that one of the most common budgetary compromises of the previous decade has been more nondefense spending for more defense spending."
Rueters reported that on 5/5/2021,twenty bipartisan U.S. senators wrote a letter to the heads of the Appropriations and Armed Services committees supporting Lockheed Martin Corp's F-35 jet, which has suffered from cost overruns and delays.The senators urged funding of modernization and sustainment plans for the jet, which has struggled to meet targeted cost-per-flying-hour goals as well as mission capability rates. This letter follows the 4/28/2021 letter ahead of the of the Pentagon's 2022 budget request in the coming weeks and is signed by 132 members of the U.S. House of Representatives saying"near-peer adversaries like China and Russia continue to advance their air
defense systems, develop their own 5th generation fighters, and invest heavily in emerging technologies that threaten America's military edge."
Stock Selection Guide
FY 2021 Q1
1
VISUAL ANALYSIS of Sales, Earnings, and PriceLatest Quarter Year Ago Quarter Percentage Change
Sales ($M) Earnings Per Share 16,258
15,651 3.9%
6.56 6.08 7.9%
Industry
Data taken from
05/11/21
Lockheed Martin Date
BI Stock Data Service NYS
Reference Aerospace & Defense DANIELSON
Company Prepared by Where traded
Capitalization --- Outstanding Amounts
0.0 % Insiders % Institution
(M Shares) 280.0 0.3 71.8
($M) 12,163.0 % to Tot Cap 65.8 % Pot Dil 0.4 ($M)
Preferred Common Debt
Symbol: LMT
This combines price appreciation with dividend yield to get an estimate of total return. It provides a standard for comparing income and growth stocks.
5
5-YEAR POTENTIALA Indicated Annual Dividend Closing Price
9.80
387.82 = Current Yield
B AVERAGE YIELD - USING FORECAST HIGH P/E
C COMPOUND ANNUAL RETURN - USING FORECAST HIGH P/E Avg. % Payout
= =
Annualized Appreciation Average Yield
Annualized Rate of Return
0.0268 2.7 %
4.0 %
7.7 % 3.4 % 11.1 % 58.9 %
COMPOUND ANNUAL RETURN - USING FORECAST AVG P/E Annualized Appreciation
Average Yield
Annualized Rate of Return
4.1 % 4.0 % 8.1 %
=
Forecast High PE =
17.50 = 3.4 %
AVERAGE YIELD - USING FORECAST AVERAGE P/E 58.9 %
Avg. % Payout
Forecast Average PE 14.80
Lockheed Martin
2
EVALUATING Management2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Last 5 Year Avg.
Pre-tax Profit on Sales 7.8% 8.6% 9.2% 11.5% 10.9% 10.3% 10.3% 10.9% 12.1% 12.6% 11.2%
% Earned on Equity
86.2% 6,880.7
% 227.2% 77.5% 124.3% 154.0% 90.2% 524.2% 158.4% 138.5% 135.3%
% Debt To Capital 86.6% 99.4% 55.6% 64.5% 83.1% 90.4% 105.0% 91.0% 80.2% 66.9% 86.7%
This shows how stock prices have fluctuated with earnings and dividends. It is building block for translating earnings into future stock prices.
3
PRICE-EARNINGS HISTORY as an indicator of the futureA B C D E F G H
Year Price Earnings Price Earnings Ratio Dividend % Payout % High Yield High Low Per Share High A / C Low B / C Per Share F / C * 100 F / B * 100
2016 269.9 200.5 12.38 21.8 16.2 6.77 54.7 3.4
2017 323.9 248.0 6.64 48.8 37.3 7.46 112.3 3.0
2018 363.0 241.2 17.59 20.6 13.7 8.20 46.6 3.4
2019 400.0 256.8 21.95 18.2 11.7 9.00 41.0 3.5
2020 442.5 266.1 24.50 18.1 10.9 9.80 40.0 3.7
AVERAGE 242.5 19.7 12.1 58.9
CURRENT/TTM 24.98 10.40 41.6
AVERAGE PRICE EARNINGS RATIO: 15.9 CURRENT PRICE EARNINGS RATIO: 15.5
387.82 (05/11/21)
CLOSING PRICE HIGH THIS YEAR 417.62 LOW THIS YEAR 319.81
Assuming one recession and one business boom every 5 years, calculations are made of how high and how low the stock might sell. The upside-downside ratio is the key to evaluating risk and reward.
4
EVALUATING RISK and REWARD over the next 5 yearsA HIGH PRICE - NEXT 5 YEARS
B LOW PRICE - NEXT 5 YEARS
Avg. High P/E X Estimate High Earnings/Share Forecasted High Price $
(a) Avg. Low P/E
(b) Avg. Low Price of Last 5 Years (c) Recent Market Low Price (d) Price Dividend Will Support
X Estimate Low Earnings/Share Forecasted Low Price $
Indicated Dividend
High Yield =
10.40
3.68% =
Selected Forecasted Low Price $
17.5 32.10 561.8
12.1 24.50 296.5
242.5 256.8
282.4
330.0
=
=
C ZONING
Forecasted High Price Minus Forecasted Low Price Range. of Range
Buy Zone Hold Zone Sell Zone
to to to
Present Market Price of is in the Zone
561.8 330.0 231.8 57.9
330.0 387.9
387.9 503.8
503.8 561.8
387.82 BUY
=
D UPSIDE DOWNSIDE RATIO (POTENTIAL GAIN VS. RISK OR LOSS) High Price
Present Price
561.8
387.82 = = To 1
Minus Present Price Minus Low Price
387.82 330.0
173.96
57.82 3.0
using 25%-50%-25%
25%
E PRICE TARGET (Note: This shows the potential market price appreciation over the next five years in simple interest terms.) High Price
Closing Price
561.8
387.82 = 1.4486 X 100 = 144.86 - 100 = 44.9 % Appreciation