by zainjavaid
Today I’m going to be covering the largest defense contractor in the United States; Lockheed Martin (LMT). This is my first attempt at writing a DD, so sorry in advance if it’s dense.
Business
Lockheed Martin is a well-known federal defense contractor. Lockheed is responsible for some of the most storied and powerful fighter jets in the world such as the F-16, the C-130J Hercules, the F-35, and many more. They’re also a very influential missile producer with offerings including the PAC-3 system, the THAAD System, the Javelin Missile, and the Hellfire Missile.
Lockheed gets 74% of its revenue comes from the US government, 25% of its revenue from international governments and 1% was from commercial and other customers.
Their operations can be broken up into 4 distinct segments: Aeronautics (40% of revenue), Rotary and Mission Systems (25% of revenue), Missiles & Fire Control (17% of revenue), and Space (18% of revenue). Let’s take a closer look at these segments.
Aeronautics
This segment includes advanced military aircraft and unmanned drone production. This is probably Lockheed’s most storied segment and is where a majority of people know them from. The F-35 program made up over 69% of the aeronautics segment’s net sales in 2020 and is the crown jewel of Lockheed Martin’s aerospace offerings. Production of the F-35 is expected to continue for a long time given the US government’s inventory objective of 2,456 aircraft, commitments from 6 other international governments, and interest from other countries.
The drone part of this segment is very promising. Drone spending is expected to have a CAGR of 19.8% through 2023, and seeing as Lockheed is the largest drone producer in the US, they stand to benefit significantly.
In 2020, Lockheed Martin delivered 120 aircraft including 46 to international governments. This segment got 69% of its revenue from US government customers and 31% of its revenue from international governments.
Missiles and Fire Control
This segment provides air and missile defense systems, tactical missiles, and ground precision strike weapons. Some of their famous offerings include the Patriot Advanced Capability system and the Terminal High Altitude Area Defense system. They also have some more cutting-edge (and expensive) offerings such as the Sniper Advanced Targeting Pod and the Infrared Search and Track fire control system.
Rotary and Mission Systems
This segment provides commercial helicopters, surface ships, radar systems, cyber solutions, and simulation systems. This segment got 72% of its revenue from the US government, 25% came from international governments, and 3% came from commercial customers.
Space
This is the segment we know the least about as a lot of its operations are classified. The main customers of this segment are the US Air Force, the US Navy, and the National Guard. The US government accounted for 87% of revenues and the rest came from international customers.
This segment produces satellites, space transportation systems, and strategic, advanced strike, and defensive systems. One of the largest programs in this segment is the Trident II D5 Flett Ballistic Missle, the Space-Based Infrared System, and the Orion Multi-Purpose Crew Vehicle. I can see massive tailwinds making this a very profitable segment.
Revenues
Lockheed brought in revenue of $65.398 Billion in 2020, a 9.34% gain YoY, a 30.88% gain from 3 years ago, and a 61.33% gain from 5 years. I think these numbers are absolutely staggering considering the performance of other Aerospace companies this year (Raytheon’s revenue contracted 26.55% YoY and General Dynamic’s revenue declined 3.62% YoY).
Switching over to COGS, we have COGS of $56.744 Billion in 2020, an 8.82% gain YoY, a 30.90% growth from 3 years ago, and a 57.49% growth from 5 years ago. While these increases may seem large, I’d argue that in the Aerospace industry, it’s only natural that COGS growth will follow revenue growth. The only thing I’d want to see when it comes to this is revenue growth outpacing COGS growth which it has in Lockheed’s case.
Finally, taking a look at Net Income, we see a 2020 total of $6.833 Billion, a 9.63% gain YoY and a 112.04% gain from 5 years ago (I left out 3-year growth because they had just spun-off a company meaning we get a growth rate of 248.46%).
Margins
Lockheed Martin currently has a net margin of 10.45%. Their net margin has expanded by 17.54% in the last 5 years. Comparing this margin to their peers, Raytheon is currently operating at a -5.55% net margin and General Dynamics is operating at an 8.35% margin.
Cash On Hand/Debt
Lockheed Martin currently has cash on hand of 3.16 Billion, representing an increase of over 108% YoY. The amount of cash they’ve stockpiled makes me think they may be gearing up for an acquisition, or (much more likely) continuing to pay done debt.
Speaking of debt, Lockheed Martin has been paying down debt significantly for the last 5 years. They’ve shrunken debt by 18.42% in the last 5 years and 13.64% in the last 3 years.
Free Cash Flow
Lockheed Martin has had a growing FCF for a while now. In the last 3 years, they’ve grown FCF by 41.22%, and grown it by 92.88% from 5 years ago.
Dividends
One of the most surprising things I found about Lockheed is its dividends. Lockheed currently pays a 2.99% annual dividend ($2.60 quarterly) that they’ve grown for 18 consecutive years. In the last 5 years, they’ve grown the dividend by 59.34% and maintain a payout ratio of 40.75%.
For me, the fact that they pay such a hefty and sustainable quarterly dividend was just an affirmation that Lockheed has been undervalued by the market.
Price Ratios/Other
Lockheed has a TTM PE of 13.24x. This compares well with the current average industrials PE of ~32x. Considering the growth rates we’ve observed in the last 3-5 years, I feel like this is a pretty low PE, although I recognize the short-comings and general unreliability of the PE ratio when it comes to valuation.
What I find really interesting about Lockheed is just how efficient they are at generating capital. They have an ROE of 149.38%! This number is even more insane when you consider their peers’ ROEs. Raytheon has an ROE of -5.53%, General Dynamics has an ROE of 23.00% and Northrop Grumman has an ROE of 32.03%.
Conclusion
I’m really bullish on Lockheed. I think they’ve been undervalued by the market just because they’re a member of a sector with some laggards. That being said, I would love to hear some second opinions as I’m not as experienced as many of you are.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.