- On an international front, where do the opportunities lie?
- How will these opportunities effect growth?
- The current share value and what to expect looking forward.
With U.S. federal budgets under pressure and long-term fiscal challenges on the horizon, Lockheed Martin (NYSE:LMT) is taking proactive measures to position themselves for growth and continued success.
One of the ways that Lockheed Martin is looking to position themselves for success is through international growth. Even though the company currently does business with 70 different nations and has more than 1,000 global partnerships, the company has derived ~82% of their net sales from the U.S. Government.
In 2013, as ~18% of the company's net sales were generated from international customers, Lockheed Martin's strategy to grow international sales over the next several years is vital to the long-term success of the company. In the short-term Lockheed Martin's goal is to generate ~20% of their sales outside the United States by the end of next year.
A key step in the plan to diversify company sales was the creation of Lockheed Martin International. The program is designed to increase exposure and sales outside the United States and focus on international sales where military spending is expected to increase in the future. In a recent media statement Chairman, CEO and President Marillyn A. Hewson stated: "Our international expansion will fuel our company's sustainable growth, bring economies of scale and the associated savings to our domestic and international customers, and enable a strong, safer future for our nation and allies around the world."
As the F-35 is expected to become Lockheed's largest international money maker, President, CEO and Chairman Marillyn A. Hewson has been spending a lot of time traveling to meet with international customers. In the so far in 2014 Marillyn A. Hewson has met with customers in the UAE, Israel, Poland, Germany, Singapore and Japan. On the domestic front she has met with ambassadors and visiting senior leaders from many other nations.
Within the focus of international growth, Lockheed Martin has made some significant gains.
1. In May, Lockheed Martin Canada announced the signing of a contract with the Government of New Zealand for the upgrade of the Royal New Zealand Navy's two ANZAC Class frigates. This represents significant growth for the company internationally as this is an export from one of the company's operations outside of the US to another customer outside the U.S.
2. Lockheed Martin has agreed to terms with Israel where the country is buying Lockheed's information technology services.
3. Lockheed Martin UK is pursuing the export their turret system designed for armored fighting vehicles internationally.
4. Even though the F-35 has been fraught with issues, at this point 11 different countries are expected to purchase the fighter . According to reuters the U.S. will lead the way with the purchase of 2,443 fighters in total, while Britian, Turkey and Austrialia all have orders that are for 100+ fighters.
At current levels the United States is spending more than 3.5x as much as any other country on defense. U.S. defense spending equates to ~38% of all military spending globally, but as many countries are looking to increase spending and the U.S. is looking to keep spending increases flat for the foreseeable future creating a global web of investments outside the U.S. looks to be a logical plan for growth.
Free Cash Flow = Operating Cash Flow - Capital Expenditure
Over the past three and a half years, Lockheed Martin has been able to sustain positive free cash in every year. Even though 2012 represented the beginning of a new cycle and the lowest level of cash, the company now has ~$4.108 billion. With that cash the company is looking at repurchasing shares and continue to increase its dividend.
- 2011 - $4.253 billion - $987 million = $3.266 billion
- 2012 - $1.561 billion - $942 million = $619 million
- 2013 - $4.546 billion - $836 million = $3.710 billion
- 2014 TTM - $4.915 billion - $807 million = $4.108 billion
In the section below I will use the Discounted Cash Flow valuation model to estimate the current value of Lockheed Martin's shares as well as using the model to estimate future valuations.
I believe using the Discounted Cash Flow valuation model for Lockheed Martin to be fair, because DCF analysis can help one see where the company's value is coming from and can generate an opinion based on that.
|FY 2014 TTM||5% growth EBITDA||10% growth EBITDA||Analyst Estimates FY 2014|
|Unlevered Net income||3,490|
|Free Cash Flow||3,728||3,728||3,728||3,728|
|Terminal Value 10.17X EBITDA||60,440||63,462||66,484||65,658|
|Sum of Parts||$64,168.31||$67,190.33||$70,212.34||$69,385.52|
|Net Present Value||$59,591.67||$62,398.15||$65,204.63||$64,436.78|
|Cash and Cash Equivalents||3,264||3,264||3,264||3,264|
Using the DCF above, there are a couple of results based on the projected earnings of Lockheed Martin.
1. Based on Q2 numbers, the stock is still undervalued.
2. Based on the rest of the year earnings growth of ~5%, disregarding any share buybacks in which management stated they would do, I have a value of $186.39 per share, or ~11.17% higher than the current stock value of $167.66.
3. Based on the rest of the year earnings growth of ~10%, disregarding any share buybacks, I have a value of $195.18 or, ~16.42% higher than the current stock value of $167.66.
4. Analysts at 4-traders have a FY 2014 target EBITDA of $6.595 billion. With that estimate, I have a valuation of ~$192.78.
Based on the valuations above, I have the company trading at 10.17x EBITDA. This is based on the different business trading at different valuations. Within the different businesses, I have the Aeronautics and Mission Systems trading at 11.23x EBITDA. 11.23x EBITDA is the industry average for Aerospace / Defense while the remaining segment trade at 9.47x EBITDA which is the industry average for communications and information systems.
In my opinion concentrating on a global platform will mitigate some of the risks that the company faces. As this is a very competitive business has possesses many different types of risk, focusing on International military spending should will mitigate domestic risk but also add foreign risk. As military spending is expected to increase in Asia and the Middle East being part of this growth will drive increased investment and innovation which will impact all global militaries, thus leading to more opportunities for Lockheed Martin.