Streetwise for Sunday, April 21, 2019
With alternating tides of enthusiasm and pessimism roiling the financial markets, there is no better time than now to do some bargain hunting. One company to consider might be Lockheed Martin (LMT). The company operates through four segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space.
Chalking up $54 billion in annual revenues, Lockheed operates in an oligopoly market with few competing firms that rival it in scale or clientele. Specifically, the company has forged longstanding relationships with governments and private firms who are driven by the need for continuity of service, equipment, and operational stability.
Given that security and defense solutions are subject to stanch demand, defense enterprises such as Lockheed benefit from consistent revenue expansion, allowing the company to reliably sustain and increase revenues despite market vagaries.
A year ago, my estimated earnings number for 2018 was $15.75 with a 12-month projected share price of $375. There was also an indicated dividend yield of 2.31 percent.
Unfortunately, I was a little too bullish regarding the company’s share price, as the shares recently traded at about $308 per share. However, earnings for 2018 came in at $17.59 per share, well above my projection.
The question now is whether Lockheed is still a worthy investment candidate? It is. And here is why.
Lockheed is expected to release its first quarter results on April 23. Look for a revenue number of about $12.65 billion, up 8.7 percent from the year-ago quarter, and earnings for the quarter coming in at $4.29 per share, an increase of 6.7 percent when compared to a year ago.
The company’s earnings guidance for 2019 is driven by its Aeronautics and its Missiles and Fire Control segments. The latter is its fastest growing business area with around 10 percent expected growth over and above 2018 while its largest segment Aeronautics is expected to grow in the high single-digit level.
The Aeronautics segment had strong momentum last quarter as indicated by increased backlog and continued interest from international communities while MFC has received large orders for interceptors.
Although RMS is Lockheed’s second largest segment, growth is expected to be just slightly above 2018 results, although it is unlikely to overtake the expected growth from the other two segments.
In terms of revenue prospects, Lockheed’s positioning is secure on both a short and long-term basis. The current political landscape provides a favorable operating environment for Lockheed. The House approved $684 billion in appropriations for military and defense spending for fiscal year 2019.
Furthermore, Lockheed has $110 billion in backlog orders, a 400-billion-dollar F-35 development program, and the company’s new nuclear fusion technologies.
The F-35 program is one of the most ambitious and expensive military programs ever created with Lockheed planning to produce 3,000 military aircraft.
Revenues are steadily growing with an 8.12 percent average profit margin. Lockheed expects 2019 earnings from continuing operations to be in the range of $19.15 to $19.45 per share, nearly 10 percent higher than its results in 2018.
Cash from operations is likely to equal or exceed $7.4 billion, recognizing both the invoices that are carried over into 2019 from 2018 and an improved outlook from the business areas for the year.
The company’s current indicated dividend is $8.80 per share up 7.3 percent from last year. Over the last 5 years, Lockheed has increased its dividend 5 times on a year-over-year basis for an average annual increase of 10.60 percent. Lockheed’s current payout ratio is 49 percent, meaning it paid out 49 percent of its trailing 12-month earnings as dividends.
The intrinsic value of the shares using a discounted free cash flow to the firm model is $640. My estimated earnings number for 2019 is $19.75 with a 12-month projected share price of $345. There is also an indicated dividend yield of 2.90 percent.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to ww.RuddReport.com.