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Lockheed Martin analysis: Shares of the popular arms giant have one big catch

Jamie Cameron
16. 4. 2023
6 min read

The defense industry is a favorite target of many investors who are aware of its growth and defensive qualities. Lockheed Martin is and always has been one of the most popular representatives of this sector. But is now a good time to buy it?

The F-35 is just one of LMT's products

Basic overview

Lockheed Martin $LMT+0.0% is an American multinational corporation operating in the defense and weapons industry. It is one of the largest arms companies in the world.

Lockheed Martin was founded in 1995 by the merger of two major arms companies, Lockheed Corporation and Martin Marietta. The company is headquartered in Bethesda, Maryland.

Lockheed Martin specializes in the development, manufacture, integration and support of services, systems and products in aerospace, defense, security, civil aviation and environmental applications. Their major products include:

F-35 Lightning II fighter-bombers - the most advanced 5th generation fighter for the USAF, USN and others. Tomahawk, Harpoon and JASSM missiles. ASAT Aegis Ballistic Missile Defense. AN/AQS-650 and AN/QZY-3 sonar systems. T-6 Texan II training aircraft. Patriot and THAAD air defence systems. BMEWS and DSP early warning systems. Space Station Freedom spacecraft for the Skylab program. C-130J Super Hercules and P-3 Orion aircraft for the Navy. UH-60 Black Hawk multi-role helicopters.

Lockheed Martin is one of the world's most profitable and influential defense companies.

https://www.youtube.com/watch?v=aPEy3QwsKjQ

Sector and competition

The defence industry is a highly competitive global sector with only a few large multinational companies operating. Lockheed Martin is one of the largest and most influential companies in this sector. However, there are many competitors.

  • Boeing - The second largest arms company in the US. Specializes primarily in aircraft (F/A-18 Hornet, EA-18G Growler, F-15E Strike Eagle), missiles, drones, and space systems. Unfortunately, it has become a competitor to Lockheed Martin in the development of the F-35 fighter jet.
  • Raytheon - The third largest weapons company in the US. Focuses on missiles, rockets, torpedoes, electronic systems, radar, and cyber defense. It produces complex systems such as Tomahawk, Harpoon, Patriot, THAAD and Aegis.
  • General Dynamics - Fourth largest defense company, specializing in submarines, ships, tanks, military vehicles, weapons and munitions. Manufactures Virginia Class submarines, Ticonderoga cruisers, and Evolved Sea Sparrow missiles.
  • Northrop Grumman - Fifth largest weapons company focused on stealth aircraft (B-2 Spirit)
  • General Atomics - Sixth largest defense company specializing in drones (Predator, Reaper), nuclear weapons, torpedoes, and electronic warfare systems.
  • Dassault Aviation - One of Europe's largest manufacturers of military aircraft (Rafale). Strong competitor of US companies in selling fighter aircraft abroad.

The defence industry brings both benefits and significant risks.

The benefits are quite numerous. The defense sector is usually very profitable because companies can sell their products to governments at high prices. Lockheed Martin often achieves margins of 10-15%. Defense spending by governments is usually stable and reliable, which creates long-term contracts and orders for these companies. They can also count on strong government support, which is willing to provide contracts and grants to sustain key defense capabilities and technologies. To maintain a competitive advantage, companies in this sector are constantly developing new technologies, weapons and systems. This leads to a high level of innovation, research and development.

But there are equally many risks. Demand for defence systems is dependent on the budgets of the Ministries of Defence and Security, which are politically negotiated. Sudden budget cuts can jeopardise company profits. Defence companies face political scrutiny and pressure because they are considered a sensitive area. This can lead to committee meetings, investigations and restrictions. Certain defence programmes and weapons can provoke public protests and controversy. This can have a negative impact on the reputation of the company and cause delays or cancellation of programmes. In addition, technological dependence. Companies often depend on the supply of specific technologies from a limited number of suppliers. Disruption to these supplies could jeopardise many of their programmes. Last but not least, a shortage of skilled workers. All companies in this sector suffer from a shortage of engineers, scientists and professionals with relevant skills and experience. This situation can slow down the innovation capacity of companies.

Current situation

Based on current consensus estimates for 2023, Lockheed Martin today trades at 22.5 times net earnings. This means that the stock is currently trading at a small premium to the five- and 10-year median earnings multiples of 17.9.

With higher interest rates, stock valuations should theoretically be lower, all else being equal. While I don't think Lockheed Martin is particularly expensive today (by its own standards and by the sector's standards), the stock is not a bargain - neither when we look at the valuation in absolute terms nor when we look at the current valuation compared to how the company has been valued in the past. Personally, I think $LMT+0.0% is really high quality, but unfortunately a bit overpriced. Dividend investors might not mind long-term if they are concerned about stability and longevity. The question is whether it's worth it for less than a 2.5% yield. And of course - it's always better to buy undervalued stocks, not overvalued ones.

Though of course Lockheed Martin stock can still rise in the long run as the underlying business grows and LMT continues to reduce share count while increasing dividends over time.

Lockheed is reducing the number of shares outstanding, thereby increasing value for its shareholders. Source
Moreover, Lockheed's dividend is definitely dependable. It has been increasing it for decades. Source

Long-term growth drivers will include increased military spending by the U.S. and other NATO members. In particular, countries in Europe that have not spent much on the military in the past will be forced to spend more money on defense equipment to meet NATO spending targets and to improve the performance and capabilities of their militaries. Non-NATO partners of the U.S., such asSouth Korea and Japan, are also increasing their defense spending over time, which presents business growth opportunities for Lockheed Martin.

While the space and nuclear technology business is not particularly large at present, it also certainly provides the company with significant long-term growth potential.

Speaking of valuation - If we look at the company's long-term earnings, we find that it is a mostly steadily growing company, with long-term earnings growth of 11%. However, the company seems expensive today - as I mentioned above. It expects earnings growth to accelerate again in 2024, thanks to growth in F-35 aircraft maintenance and additional orders in all areas of the business.

Free cash flow has been growing at around 9% per year for a long time. Outside of significant capital actions and one-time expenditures, it appears relatively stable and is projected to grow in the low to mid single digits over the next few years.

What do you think? Can $LMT+0.0% grow even further or will it return to a fair valuation?

Disclaimer: This is by no means an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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