Military conflict isn’t exactly the type of thing you want to be right about betting on. But war happens and when capital flows to defense contractors, it’s time to take notice.
The United States has one of the largest defense budgets in the world and is home to some of the biggest defense contractors, including Lockheed Martin Corporation (LMT).
This industry leader is worth paying close attention to when concerns are high of military engagements on the horizon. The share price has bucked the market trend this year, up over 20% year to date, so is now the time to buy?
Lockheed Martin is a one-stop shop for military needs
Lockheed Martin isn’t the biggest military company, but it does hold an impressive market share. With a market cap of over $114 billion, it is a defense giant, offering more than just military supplies.
Spanning four divisions, Lockheed Martin encompasses:
- rotary and missions systems,
- space, and
- missile and fire control.
The United States government is the company’s biggest customer. Lockheed Martin’s $140 billion backlog of work is also encouraging from an investment standpoint; it has a predictable revenue stream for the foreseeable future. These contracts help the company maintain more consistent earnings during unpredictable times. Even if quarters or years fluctuate, investors know what to expect from this backlog.
This defense stock is up during the market correction
From PayPal to Netflix, hundreds of large-cap stocks have dropped as much as 60% or more from their 52-week highs. However, this isn’t the case for Lockheed Martin. On the surface, it’s obvious why war-related stocks are surging this year. Russia’s war on Ukraine continues to escalate — but there’s more to the story.
After having a rough year in 2021, Lockheed Martin investors were pleased with the company’s most recent quarterly results. As the company navigated a transition period, Lockheed Martin focused on returning cash to shareholders.
On October 18, 2022, Lockheed came through, reporting solid financial results. In Q3 2022, net earnings were $1.8 billion or $6.71 per share, compared to $614 million or $2.21 per share in Q3 2021. Free cash flow hit $2.7 billion in this year’s third quarter, compared to $1.6 billion during the same period last year.
The company’s latest financial report announced an additional $14 billion share repurchase authority. Plus, its industry-leading dividend also increased by 7%.
From a valuation perspective, we see upside of 22.1% in LMT shares to $535 per share.
Are there any concerns?
Over the past few years, Lockheed underperformed compared to the S&P 500. Growth-focused companies saw their valuations skyrocket in 2020 and 2021, while companies like Lockheed were less favorable. This year, the opposite has occurred largely because of concerns that Ukraine conflict will escalate.
Tensions are also building in other areas of the world, causing several developed countries to ramp up their defense spending. Japan and Germany are among them. The defense industry should see capital inflows over the medium term. So, are there any red flags?
For Lockheed Martin specifically, sales are expected to fall flat in 2023. However, growth is anticipated to return come 2024.
Lockheed’s most significant source of revenue is its aeronautics division, which pulled in over $7 billion — compared to $6.57 billion in last year’s third quarter. The company’s space segment was also up. However, its helicopters and missile units underperformed. So, what does that all boil down to?
Is Lockheed Martin a buy?
There are a lot of things to like about Lockheed Martin. The company has stable earnings, plenty of cash to support its growing dividend, and predictable guidance. All things considered, Lockheed Martin is a great value and dividend stock.
The upside to fair value is north of 20% and mounting global tensions make this a solid holding in any balanced portfolio.
Should capital flows into the shares be a predictor of military escalation across the world, LMT should be a safety net, at least for your portfolio.