Originally published on Aug. 28, 2014
Despite being the United States' major military contractor, Lockheed Martin (NYSE:LMT) is far from finished with its work. The great spike in the LMT stock price appears frightening at first glance, but this is not the kind of company that should be overlooked. It has established itself as an aeronautics and defense company with 5 separate internal segments: aeronautics, information systems and global solutions, mission systems and training, missile and fire control, and space systems. By far, LMT is the largest competitor in the market, even standing next to Boeing (NYSE:BA) and Northrop Grumman (NYSE:NOC). About 82% of the company's sales come from government orders while the remaining 18% comes from international sales and U.S. commercial sales. After all of the accomplishments, Lockheed Martin still manages to have heavy earnings growth potential.
During the summer of 2013, the aerospace and defense industry was hit severely by the Bipartisan Budget Act, which reduced military spending. The company's net sales did slide about 4% due to the cut backs, but net earnings increased by almost 9% in the same year. LMT's stock price was able to grow by about 62% anyway. This is due to global outlook and support and an increase in product orders despite the budget limits that were imposed by the Department of Defense. Lockheed was no exception to this set back, unfortunately, but it is gradually regaining its strength. Do not be turned off by the expected backlog of over $80 billion just yet. Orders with a gross value of over $40 billion are expected to ease the tension and also keep in mind that building a jet does not happen overnight. Multi year contracts are set in place to allow thorough completion of the order. $80 billion is actually quite small compared to comparable competitors like Boeing, with a $440 billion backlog.
South Korea is set to buy the F-35 Joint Strike Fighter, Lockheed Martin's most highly demanded military product. As of right now, the fighter jet costs up to $142 million depending of the class of airplane. That cost is expected to be comparable to competitor costs by the year 2019. The fighter jet was built and released in only the year 2013. Lockheed Martin is currently working with the Pentagon and F-35 contractors in the U.S. and abroad to lower the cost of the jet by investing tens of millions of dollars from their own pockets.
Recently, the U.S. Air Force gave LMT two orders for satellite systems for their expansion program. On top of that, the company just completed the acquisition of Zeta Associates, which is a communications signals and processing systems provider. The acquisition's intended purpose is to help LMT spread air, ground, and aerospace information in order to aid crucial exploratory missions.
Looking into the future, one can see that Lockheed Martin has no intentions of resting on its laurels. To the tune of $205 million, the company also entered into a contract with Victorian Wave Partners for the largest electricity generation project. In addition, a robotics segment of the U.S. Army entered into a contract to allow LMT to conduct target acquisition (obtaining a target), autonomous reconnaissance (exploring outside of friendly territory to gain important information about enemies), and surveillance missions.
On August 18, 2014, LMT finalized a contract with a manufacturing segment of the U.S. Navy to test out the new FORTIS exoskeleton. The new exoskeleton is meant for industrial use and allows a human being to hold tools and other objects up to 36 pounds easily, therefore eliminating muscle fatigue often experienced by industrial laborers. While we're speaking of contracts, let's not forget the contract with the Terminal High Altitude Area Defense ((THAAD)), a "missile defense system used to counter ballistic strikes". Lockheed Martin's Missiles and Fire Control segment has the responsibility to deliver proper equipment to THAAD in Alabama.
Before concluding this analysis, I must include Lockheed Martin's experimentation with graphene. For those who aren't aware, graphene is a form of carbon this is extremely strong, lightweight, and supposedly a better conductor of heat and electricity. The company has found a way to use it in an unconventional manner, however. The company is using the material for water filtration and desalination (removing salt from earth's salt water) systems and was recently awarded a patent for their "nanopore-based" filters. An elementary school student might tell you that the earth is about 75% water, so the world can't go thirsty. That, however, couldn't be more false. Only 2.5% of earth's water is fresh, and most of it is difficult/expensive to access, such as the water trapped under ground or in glaciers. Current filtration and desalination strategies are also incredibly expensive, so graphene could be the possible fix to this issue. Graphene is made up of a lattice of carbon atoms that are arranged in a hexagonal pattern. This allows basically only water to pass through it and no other substance. Be aware though, that graphene is only a very recent discovery, so this is definitely a future prospect (not an issue for value investors). Lockheed is looking into ways to reduce the cost of graphene for production use before it can commercialize the water filters. The completion of this project would expand Lockheed's stance in the U.S. commercial market by decreasing energy costs to filter the earth's abundance of water.
With this evidence, it is obvious that Lockheed Martin is not at its final frontier. It is a financially and intrinsically stable company that has the strength to keep pushing forward and expanding.
5-year stock chart:
Year-to-date stock chart with competitors:
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.