Due to funding cutback from the government, the 2013 outlook of the Aerospace sector seems grim. In fact, after it reported its earnings, Lockheed Martin (LMT) has dropped nearly 9% in a week. General Dynamics (GD) dropped about 6% during the same time, and for Raytheon (RTN), a loss of almost 10%. Yes, the sky is falling on the sector, but there will always be a demand for defense equipment where humans are around. In addition, these companies are dividend growers.
Initially, I took notice of Lockheed Martin's fat 5% yield, but to make a better analysis, I'm going to compare it with its 2 peers: General Dynamics and Raytheon.
Dividend Growth
| Stock | # Years | Price | Yield | DGR: 1Yr | 3Yr | 5Yr | 10Yr |
|---|---|---|---|---|---|---|---|
| LMT | 10 | $86.87 | 5.3% | 23.1% | 19.6% | 22.2% | 24.7% |
| GD | 21 | $66.3 | 3.08% | 9.3% | 10.3% | 12.7% | 13% |
| RTN | 8 | $52.68 | 3.8% | 15.9% | 16.8% | 13.9% | 25.4% |
* Number of years of dividend growth and dividend growth rate data from David Fish's CCC List
Looking only at the yield and dividend growth, Lockheed Martin wins (so it gets 3 points. Raytheon gets 2. General Dynamics gets 1.)
Valuation
Looking at the last 10 years of P/E ratios and the current TTM P/E ratio on Morningstar, Raytheon is the only one having the lowest valuation compared to the last 10 years. (So, Raytheon gets 2 points. The other 2 get 1 point each.)
Who has the widest moat?
Vuru shows GD having the widest moat of the three, followed by Raytheon. (GD - 3 points. RTN - 2 points. LMT - 1 point.)
Percentage of stocks bought back between 2002 and 2011
| Stock | % Bought Back | # Years |
|---|---|---|
| LMT | 24.5% | 9 out of 9 years |
| GD | 9.4% | 5 out of 9 years |
| RTN | 13.3% | 6 out of 9 years |
Other than paying out dividends, another way for companies to return value back to shareholders is by doing stock buybacks. (In this category, LMT gets 3 points, GD gets 1 point, RTN gets 2 points.)
Debt
| Stock | Quick Ratio | Debt to Equity Ratio |
|---|---|---|
| LMT | 0.9 | 2.67 |
| GD | 0.6 | 0.28 |
| RTN | 1.5 | 0.51 |
One maybe concerned for Lockheed Martin's large debt to equity ratio. On the other hand, Raytheon seems to be managing its debt well with the largest quick ratio and a healthy debt to equity ratio. (LMT scores 1; GD scores 2; RTN scores 3)
Profitability
| Stock | Gross Margin | FCF | EPS |
|---|---|---|---|
| LMT | 11.1% | 1252M | 8.36 |
| GD | 19.6% | 1889M | -1.03 |
| RTN | 24% | 1131M | 5.65 |
It's hard to put a score for this one since RTN has the highest gross margin, but LMT has higher earnings per share. (I shall give RTN and LMT both 2 points. GD gets 1 point. I haven't dug into why GD currently has a negative net income, thereby resulting in negative earnings per share, but hopefully it'd be a temporary situation.)
What's the Fair Value?
| Stock | Price | DCF1 | EPF2 |
|---|---|---|---|
| LMT | $86.87 | $90.83 | $143.78 |
| GD | $66.3 | $110.79 | $101.43 |
| RTN | $52.68 | $57.53 | $78.46 |
2 - EPF: Earnings Power Value valuation
DCF and EPF values from Vuru
The fair value of a company can be calculated different ways. So, please look at these values with a grain of salt. Perhaps compare them to your calculation of fair values for these companies.
Conclusion
The results are in! *drum roll please*
- LMT - 11
- GD - 9
- RTN - 13
The point system was just a fun and easy way to tally up to see who's the winner. In reality, certain categories might have a higher importance for your investing purposes. For example, you might avoid companies with high debt ratios.
I'll be looking to initiate a position in either LMT or RTN for dividend growth. I will see if I can scoop up LMT between $80 and $84, or RTN between $48 an $50.
Disclaimer: This article is for informational purposes, and should not be used as recommendation to buy or sell any stocks. Please do your due diligence before making any decision on buying or selling anything.
