Lockheed Martin's Great Week on Main Street

Over the last seven days Lockheed Martin (LMT) has won four nice contracts totaling $1.169 Billion to add to their backlog of orders, which prior to these orders stood at $76.4 Billion.

Here are the orders;

1) The U.S. Department of Defense's Missile Defense Agency (MDA) awarded Lockheed Martin a $1 billion contract for continued development and evolution of the Aegis Ballistic Missile Defense (BMD) Weapon System.

2) Lockheed Martin has been awarded $170 million in new Health & Human Services (HHS) information technology contracts, all geared toward improving efficiency in our nation's health systems.

3) Lockheed Martin was awarded an $853.3 million contract from the U.S. Navy for the Trident II missile production and deployed system support. Work is expected to be completed by Dec 30, 2013.

4) Lockheed Martin Corp. received a $145 million contract from the Environmental Protection Agency to provide support during environmental emergencies in the U.S. and its territories.

The company stock is currently trading at a price to free cash flow (PFCF) of 9 and a Free Cash Flow Return on Invested Capital (FROIC) of 34%.

For those who don't know;

PFCF =Market Price/ (Cash flow per share-Capital Spending per share)

FROIC = FCF per share/ (long term debt per share + shareholders equity per share)

FROIC basically tells you how much return in free cash flow a company generate for every dollar of Total Capital they employ.

I consider FROIC the primary determining factor in identifying growth companies as you can compare every company (except Financials) on an equal basis. The question I ask every company I analyze is = how much return (in percent) in FCF are you going to give me for every dollar of total capital you invest?

When investing I look for PFCF below 15 times and FROIC above 20%+. When you are lucky enough to find a combination of the two you find a perfect balance of growth + value and you get capital appreciation through capital preservation.

Lockheed Martin reported earnings last week that beat estimates but guided lower for 2010. With these orders added in the new figure for backlog of orders is now $77.6 Billion. Lockheed Martin is a stock for those who want to practice Capital Appreciation through Capital Preservation. It is both a value and high growth play and pays a nice dividend of 3.5% as well.

Disclosure: Long LMT

Comments

[User 419067:]

If everything is so fantastic why the LMT is going down?

Oct 27 08:09 AM

[Peter Mycro...:]

Stocks in the Aerospace and Defense industry are out of favor right now as investors feel that Congress and the Obama administration will cut spending. Lockheed is going to build over 6000 F-35 fighters over the next 20 years and these planes make the F-16 look like tonka toys.

www.airforce-technolog.../

This plane goes for $50 million a piece and will generate revenue of $300 Billion. It will service all three branches of the military and be sold globally.

Wall Street does very little research and operates on pure emotion, so when there is a scare of something like defense spending cuts, they just put all companies in that box and treat everyone the same.

The company itself lowered guidance for 2010 and Wall Street jumped on that and sold off the stock.

For those doing the numbers though just the $300 Billion that LMT will generate in revenues just from the F-35, will generate about $789 a share in sales for the company. That comes out to $39.47 a share per year in revenues over the next 20 years. The plane is ready to go and will enter active service in 2010.

Then if you add the rest of their arsenal;

www.lockheedmartin.com...

You can see that though defense spending may get cut LMT has more then enough to keep its busy and profitable for decades to come. I do my analysis on Main Street and only go to Wall Street to get the price that one of my companies is currently selling for. I like to buy companies that are selling for less than 15 times their free cash flow and have 20%+ Free Cash Flow return on invested capital. When you can do that and think in a 3 to 5 year time frame, things usually turn out great regardless of what the market does. If you find enough stocks like LMT to build a portfolio you should do very well over the next five years. The same scare is happening in the Health Care industry and if you go to my articles you will see my analysis of that industry and the great opportunities that they present going forward.

Disclosure: Long LMT

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

On Oct 27 08:09 AM User 419067 wrote:

> If everything is so fantastic why the LMT is going down?

Oct 27 08:48 AM

[mbkelly75:]

Stocks go up and down - that is what they do - sometimes for no real good reason at all. This is NOT a bad thing. LMT looks to be a good stock with a solid dividend. They are headed down right now - many stocks do right after they go ex-dividend. Their 20 day and 200 day Moving Averages formed a Death Cross on 15 Oct and shows the trend down. When the MAs show that it is trending up again (Golden Cross), then buy it at that time and ride the trend up. Using this simple form of Market Timing means you do not have to worry about getting caught in a downtrend by owning the stock. Sell at the Death Cross and buy at (or after) the Golden Cross. It works very well over time.


On Oct 27 08:09 AM User 419067 wrote:

> If everything is so fantastic why the LMT is going down?

Oct 27 09:08 AM

[John Galt:]

Your response to the initial poster was just as good ( maybe even better) than your article. I agree that this sector is out of flavor as expecations are lower defense spending.

Good stuff and LMT is on my watch screen.

I think thematically, if we do have economic pain/slow growth, it just rises tensions and increases the chances of war... Remember how the last Depression ended?

LMT is the Rolls Royce of defense companies by the way and uncle buffet says you are better off getting a great company at a fair price, than a fair company at a great price.

Oct 27 09:59 AM

[Peter Mycro...:]

Lockheed Martin Gets $474 Million Air Force Deal for F-22

finance.yahoo.com/news...

Disclosure: Long LMT

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Oct 29 11:03 PM

[Anthony Alfidi:]

Those contracts run for multiple years, but unfortunately LMT books the revenue up front. What happens when a bond market discloation disrupts defense contractors' favorite gravy trains? The contract termination fees won't be a fraction of projected revenue. Future earnings statements will have to be restated downwards.

Furthermore, LMT had had to put over $1B in Q3 into its underfunded pension plan. Read the transcript of their conference call and you'll see that LMT executives employ "Rosy Scenario" from the Reagan Administration's budget office. That's $1B no longer available to shareholders.

LMT is a lot riskier than it appears at first glance.

Nov 08 03:00 AM