I final wrote you about Lockheed Martin Corp (NYSE:LMT) in October 2021. At the time, I had simply initiated a brand new place in LMT. This article is an replace. My unique contribution, “Lockheed Martin: Why It’s Become a New Position in My Portfolio,” could also be discovered right here.
My funding thesis for proudly owning LMT shares hasn’t modified a lot:
Lockheed Martin stock probably stays a stable funding for long-term traders searching for each rising revenue and capital appreciation. The enterprise is well-managed, owns a robust franchise, possesses a sound stability sheet, earns its earnings in money, and is shareholder-friendly.
Using routine valuation methodologies, shares seem pretty valued. Currently, shares don’t look like buying and selling at a big low cost or premium.
Over the previous decade, Lockheed has, on common, grown working earnings and working money movement by low double-digits a yr. Historically, the enterprise tends to be recession resistant.
LMT traders have loved dividend will increase for 20 consecutive years. Today, the stock yields ~2.6 p.c. In latest years, the payout has risen over 9 p.c yearly, and the present yield is increased than different massive Aerospace and Defense shares.
Since I first initiated a place, Lockheed administration reported earnings 4 occasions. While I observe numerous monetary and operational metrics, I’ve listed a number of specifics beneath that I consider LMT traders might discover particularly useful when searching for to judge administration efficiency:
Segment Operating Margin
Free Cash Flow
Let’s break these down one-by-one.
Over the previous 4 quarters, income averaged about $16 billion. For the total yr 2022, administration guides to $65.3 billion. Doing some arithmetic signifies administration expects top-line acceleration through the second half of this yr. That’s a optimistic. Nonetheless, presuming administration meets its forecast, full-year 2022 gross sales might be down barely from 2021.
During the 2Q earnings name, administration defined the gentle income is a results of supply-chain disruptions, inflation, and buyer delays.
Additional Detail: F-35 Aircraft Program Delay
The F-35 plane program (Lots 15 to17) is de facto the core problem affecting 2022 gross sales. It’s integral to the 2Q 2022 earnings “miss” and revised full-year steerage.
Lockheed had been licensed to start manufacturing work on Lots 15 to 17, however the firm’s prices started to exceed the contract worth and accessible funding within the second quarter of 2022. As a consequence, F-35 program gross sales and money movement grew to become impaired. In addition, the corporate had roughly $1 billion in potential termination legal responsibility publicity to 3rd events associated to Lots 15 to 17.
Recently, the corporate reached an settlement in precept with the U.S. Government on an amended F-35 Lots 15 to 17 manufacturing contract. There is just not but a definitive settlement. Lockheed Martin expects to get better sure gross sales and prices incurred upon receiving revised contractual authorization and funding on the F-35 manufacturing contract. Such contractual authorization is predicted to happen someday through the third quarter of 2022.
However, till a remaining settlement is reached, or the U.S. Government in any other case supplies extra contractual authorization and funding, the corporate’s monetary outcomes will proceed to be negatively impacted. Such impression could also be materials. As a part of the LRIP Lots 15-17 manufacturing contract, the U.S. Government lowered the acquisition portions based mostly on funds availability. While the corporate expects the LRIP Lots 15-17 contract to help its long-term goal to supply 156 plane a yr, COVID-19 and different impacts skilled by the F-35 enterprise have required it to change its near-term manufacturing plan.
I consider Lockheed will resolve its F-35 contract problem efficiently. If so, present occasions are more likely to fade into the optimistic, long-term prognosis for the corporate.
Segment Operating Margin
Lockheed Martin reviews Segment Operating Margins for every of its 4 segments: Aerospace, Missiles/Fire Control, Rotary and Mission Systems, and Space. Nomenclature non withstanding, Segment Operating Margin is just Lockheed administration’s strategy to categorical EBIT margins after excluding unallocated /company objects.
Over the previous few years, Lockheed consolidated Segment Operating Margins have been reported as follows:
2019: 10.6 p.c
2020: 10.8 p.c
2021: 11.0 p.c
Despite an outlook for a year-over-year 2.6 p.c gross sales decline, administration nonetheless guides 2022 section margins to be 11.0 p.c. Through the primary half of the yr, Segment Operating Margin was 11.0 p.c.
Free Cash Flow
When present CEO Jim Taiclet took the brand new function, he said Lockheed Martin would run for money. Front and heart, administration reviews money movement and free money movement clearly.
For the full-year 2021, Lockheed recorded $6.03 billion free money movement: or ~$22 per share. This in contrast favorably with FY $22.48 EPS. It demonstrates Lockheed earns its earnings in money.
Current 2022 FCF steerage calls out ~$6 billion, on par with final yr.
At mid-year, Lockheed reported $2.74 billion free money movement. FY 2022 money movement is tracked for achievement.
Return-on-Invested Capital could be a useful gizmo to assist consider administration effectiveness. There are a number of methods to calculate the metric. Generally, I make the most of a easy components searching for to acquire a conservative perspective:
RoIC = EBIT / Total Assets much less Current Liabilities much less Cash
This is “kitchen sink” method; nevertheless it serves its objective.
RoIC is greatest thought of when in comparison with an organization’s WACC and benchmarked towards equally located friends.
For FY 2021, using the aforementioned RoIC methodology, Lockheed Martin registered 28% return-on-invested-capital. This compares moderately properly with the more moderen 2022 six-month 23% RoIC.
Currently, Lockheed Martin has ~6% WACC.
Please discover beneath a desk evaluating LMT’s half-year RoIC with a number of friends:
Lockheed Martin Corp — Return on Invested Capital versus Peers
1H 2022 RoIC
Northrop Grumman (NOC)
General Dynamics (GD)
L3Harris Technologies (LHX)
Underlying information discovered on investor web sites and calculated by writer
Lockheed Martin has the next RoIC than friends and covers its WACC simply. This signifies administration is creating shareholder worth. Indeed, the common return-on-invested-capital for the Aerospace & Defense business is about 7 p.c. LMT returns are among the many prime business performers. See the chart from constancy.com beneath.
Note that Lockheed’s listed RoI is 21 p.c versus the 23 p.c I calculated within the desk above. This is just not at problem. First, Fidelity Investments is computing RoI over 12 months versus my 6-month time-frame. Second, as famous earlier, the components for RoI can differ; Fidelity Investments might not make the most of exactly the identical components I expressed.
Other Important Observations
In conjunction with the 2Q earnings launch, administration communicated Lockheed had a $135 billion backlog. This is on par with the mid-year 2021 backlog. It additionally totaled $135 billion. Management indicated they anticipated the backlog to extend by the top of this yr.
The “Four Growth Pillars”
Despite 2022 shaping as much as be a little bit of a down yr, administration stays constructive on the longer term. They count on the corporate to renew earnings progress in 2023. Lockheed’s “four pillars” stay intact. These embrace rising:
Programs of report
New enterprise awards
Employee Pension Contract Purchased
In June 2022, the corporate bought group annuity contracts to switch $4.3 billion of gross outlined profit pension obligations and associated plan belongings to an insurance coverage firm. The group annuity contracts have been bought utilizing belongings from Lockheed Martin’s grasp retirement belief and no extra funding contribution was required. In reference to this transaction, the corporate acknowledged a noncash, non-operating settlement cost of $1.5 billion (or $4.33 per share, after-tax). When the corporate reported 2Q 2022 earnings, the accounting loss startled some traders. Reading previous the headlines, the aforementioned defined what gave the impression to be huge EPS “miss,” and obvious discount in full-year steerage. Actually, administration did not cut back the underlying working earnings.
When I final wrote you, LMT stock traded round $350 to $360 a share. Lockheed frequent gave the impression to be an undervalued safety. Since then, shares have appreciated about 20 p.c sans dividends.
Currently, the stock now not seems to be within the discount bin. A latest bid is near my present $430 to $440 Fair Value Estimate.
I arrived at this valuation by reviewing present yr price-to-operating earnings and price-to-free money movement.
Two FAST Graphs assist illustrate my opinion:
For each charts, I chosen a post-Great Recession time-frame. In addition, I elected to base my FVE upon the present fiscal yr. This is a conservative method. Lockheed could also be thought of a growth-and-income stock; performing a valuation train by searching to 2023 earnings and money movement can be acceptable.
Based FVE on 2022 expectations, I consider LMT stock has an indifference level between $430 and $440 a share. Looking forward to 2023 Street forecasts, the honest worth estimate could also be between $460 to $470 per share.
Share costs could also be bolstered by a shareholder-friendly administration workforce. The present dividend yield is 2.6 p.c. The dividend payout has been elevated for 20 consecutive years. The string ought to proceed in 2022. In addition, the board of administrators proceed to authorize stock repurchases. Over the previous yr, Lockheed’s complete diluted shares excellent have been lowered by 4 p.c.
Lockheed Martin stock stays a stable, long-term dividend progress funding. The essence of my October 2021 funding thesis stays intact.
Company fundamentals are experiencing near-term bumpiness resulting from provide chain points, inflationary stress, and buyer delays (primarily associated to the F-35 plane authorities contract Lots 15 to 17). Despite the present circumstances, margins, returns and 2022 free money movement expectations stay sturdy.
Current frequent stock costs now not mirror the numerous low cost I famous in October 2021. However, new traders searching for to build up shares might think about opening a small place, then monitoring the stock for an opportunity to purchase extra on short-term weak spot.
Please do your personal cautious due diligence earlier than making any funding determination. This article is just not a advice to purchase or promote any stock. Good luck with all of your 2022 investments.