Lockheed Martin (LMT) is one of the world's largest defense contractors and the #1 provider of Information Technology services, systems integration, and training to the U.S. Government. LMT provides a broad range of products and services to the world’s governments and commercial customers, focusing on space and missile systems, electronics, aeronautics and information systems. It manufactures military aircraft such as the F-16, F-22, C-130 and F-35 fighters. The Joint Strike Fighter aircraft (F-35) will be the primary driver of earnings and revenue for the next 10-20 years. Orders for more than 3,000 F-35s from the US and 9 foreign countries have already been booked. Factoring in replacements, parts, and service the entire contract should be worth more than half a trillion dollars.
The Pentagon currently plans to buy more than 2,400 F-35 aircraft in 3 different configurations, at a projected cost of some $380 billion through 2035. The F-35 has been developed with 8 foreign partners and LMT currently has 11 different nations looking to purchase the F-35. This is to be the fighter jet of the future whose main advantage lies in its versatility. It can be configured in 3 different forms making it adaptable for use by the Navy, Air Force and Marines. The F-35 is a very versatile fighter aircraft capable of vertical take-off and landing. It is also a stealth aircraft, which makes it almost completely radar invisible. Right now it is considered to be the most advanced fighter jet in the world. It is for these reasons that despite impending defense budget cuts Lockheed Martin’s F-35 contract will remain a primary driver of LMT’s future earnings. It will be able to replace 10 separate, soon to become obsolete, aging military aircraft now in use. All of our existing military aircraft which includes the F-18, the F-16 and F-15 are all 4th-generation fighters. The F-35 is the 5th-generation. LMT, with a $73 billion backlog, is the Pentagon's #1 contractor by sales and has projected the radar-evading F-35 would account for just over 20% of its revenue when it hits full production in the near future. LMT said it expects to sell about 750 F-35 aircraft to non US nations.
A further look at the numbers reveals that share count has been dropping consistently since 2002 when there were 455 million shares outstanding. As of September 2011 that number had dropped to 321 million. They retired more than 25 million shares since the beginning of 2011, and management is likely to continue repurchases. Cash assets started the year at $2.26 billion, as of September 30, 2011, and that has risen to $4.57 billion. However, over the same time span LMT did take on an additional $2 billion in debt, bringing the total to some $7 billion. I expect to see more dividend increases and share repurchases. LMT’s dividend was recently increased some 33% to $1/Q, up from 75¢/Q, and now yields just over 5%. Lockheed has raised its payout for 9 years running. LMT is likely to return to long-term shareholders in the form of dividends and/or share buybacks some 90% of its $3.2 billion in 2011 cash flow.
As to 2011’s earnings, consensus estimates are expecting $7.80/share up from 2010’s $7.23, and for 2012 earnings could approach $8.60. Applying a conservative PE of 12 to those earnings projections, share prices should exceed $100. A PE of 12 is not unreasonable especially since LMT has a 10-year average PE of 16 and is currently trading at a PE of under 10. Heavy cuts in military spending seem unlikely to me in an election year, and even if they do come about would probably only drop modestly. And yet if the PE does not expand to more normal levels, that 5% dividend coupled with increased earnings should reward investors with a handsome total return.