Time to get on board with Lockheed Martin?
Opdateret: juni 6
I have previously written about the defense sector and how I believe the right companies will thrive in any economic environment. Lockheed Martin is the largest contractor of the U.S. Department of Defense, and this is my analysis of the company.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For the time being I do not own any shares in Lockheed Martin but I do own shares in L3Harris, which is a competitor to Lockheed Martin. However, this will not influence my analysis of Lockheed Martin. I just wanted to give full disclosure.
Lockheed Martin Corporation is an American aerospace, defense, arms, security and advanced technology company. It was formed by the merger of Lockheed Corporation and Martin Marietta in 1995, and it is headquartered in Maryland very close to Washington D.C. Lockheed Martin Corporation it is involved in four different business segments: Aeronautics, Missiles and Fire Control, Rotary and Missions Systems and Space. It is by far the largest contractor of the U.S. Department of Defense, but they also sell to other countries, as 28 % of their sales in 2019 went to international customers. As a natural outcome of their business they have a secret moat but due to their $34 Billion F-35 fighter program with Pentagon, I would argue that they also have a switching moat, as it is unlikely that Pentagon will switch to another company due to that contract. Later we will look into the numbers but let us first have a look at their management.
Their CEO is James Taiclet. He was appointed in 2020, meaning that it is not possible to evaluate on how he has done at Lockheed Martin, but it is possible to look into his credentials. James Taiclet is not new to Lockheed Martin as he has served on the board two years prior to being the CEO. James Taiclet actually started his career as a Air Force pilot, where he also worked as an instructor before studying engineering and later studied international relations. Prior to being announced as the CEO of Lockheed Martin, he was the CEO at American Tower. Under James Taiclet's leadership American Tower went from almost being delisted from from the Stock Exchange and having a market cap on $2 billion to be a global player with assets in 19 countries and a market cap on $100 billion. During his time at American Tower the Harvard Business Review named James Taiclet as one of the world's top-performing CEOs seven times. He is also a member of the Council on Foreign Relations and was named co-chair of the U.S. - India CEO Forum by the U.S. Department of Commerce. All of this means that James Taiclet has shown great results as a manager, while he also have extensive experience in aerospace activities and international relations.
We have determined that Lockheed Martin has a secret and switching moats. We really do like the management as well. Now let us look into the big five numbers in order to see if Lockheed Martin lives up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first and most important number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. The numbers of Lockheed Martin are fantastic, if you can get a ROIC in the 30's every year, you really cannot ask for more.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. The numbers don't live up to the requirements in all of the benchmark. The older benchmarks are underwhelming, while the newest benchmarks are just below the 10 %, and I would consider them acceptable.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. It is a bit of a mixed bag for Lockheed Martin, as they only live up to the requirements in three out of five benchmarks, where one benchmark outshines the others. The oldest and newest benchmark are just short of the requirement, and I consider them acceptable.
The Equity Growth Rate in all benchmarks outshines the other growth rates so far. All benchmarks are well above the requirements and most of the benchmarks the numbers are not only great but fantastic. According to Phil Town, the Equity Growth Rate are the second most important number after the ROIC. And if you can invest in a company with these numbers, you should be intrigued.
Finally we look into the Cash Growth Rates. Compared to the other growth rates, the cash growth rate is a bit underwhelming. The numbers are by no means alarming though as they are still close to the requirement of the 10 % in each benchmark. These numbers should certainly not keep you from investing in a company like Lockheed Martin.
To shortly summarize the five numbers from Lockheed Martin. The most important number is the ROIC, which looks nothing less than fantastic in every benchmark. A ROIC of more than 30 % in each benchmark is certainly something you should be excited about. While we do see some of the benchmarks in some of the growth rates not living up to our requirements, it is certainly not something that I'm worried about as the numbers overall look great. I don't see anything in the numbers that would keep me from investing in Lockheed Martin, on the contrary, I would love to invest in Lockheed Martin based on these numbers.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on Lockheed Martin, I can see that Lockheed Martin has 1,71 years earnings in debt, which is very acceptable.
Based on the numbers and debt, Lockheed Martin looks to be a great company to invest in. However, all investments have some risks and so do Lockheed Martin. As the largest contractor of the U.S. Department of Defense, Lockheed Martin is quite depended on the U.S. defense budget. While national defense has historically been one of the top priorities of any U.S. Government, there are no guarantee that it will continue like that. If we see the U.S. defense budget to be significantly decreased, it will hurt Lockheed Martin. They can't just increase their international sales, as international sales are subject to approval from the U.S. Government due to the nature of their business. Another risk is that other companies will gain some of Lockheed Martin's market share by winning contracts from the U.S. Department of Defense.
All right, we have gone through the numbers and risks regarding Lockheed Martin, and now it is time for us to calculate a price for Lockheed Martin. In order to calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use a EPS as it is now at 24,78. I chose a Estimated future EPS growth rate of 8 (which is the mean growth rate in the last 13 years), Estimated future PE 16 (which the double of the growth rate, as the historically PE for Lockheed Martin has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $211,58, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Lockheed Martin at price of $105,79 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". In order to do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating Cash Flow last year was 8.183. The Capital Expenditures was 1.766. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to find it though, so as a rule of thump, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 1.236,2 in our further calculations. The Tax Provision was 1.347. We have 277,82 outstanding shares. Hence, the calculation will be like this: (8.183 - 1.236,2 + 1.347) / 277,82 x 10 = $298,53 in TEN CAP price.
The last calculation is the pay back time. It is also described in "MY STRATEGY". With the Free Cash Flow Per Share at 23,45 and a growth rate of 8 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $269,38.
I do believe that Lockheed Martin is a great company with a great management. I see them performing well in all economic environments and due to the current geopolitical situation, I do not think that we will see a significant cut in the U.S. Defense budget anytime soon. I would definitely open a position if Lockheed Martin hits the TEN CAP price at $298,53.
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