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Overview

Lockheed Martin Corporation engages in the research, design, development, manufacture, integration, operation, and sustainment of advanced technology systems and products in the areas of defence, space, intelligence, homeland security, and government information technology in the United States and internationally. It also provides management, engineering, technical, scientific, logistic, and information services. It is the largest defence contractor in the world and operates through 4 segments:

Aeronautics, Electronic Systems, Information Systems & Global Services (IS&GS), and Space Systems.

It has an impressive inventory turnover of 20 times TTM as of the third quarter of 2011; in comparison, the industry average is 3.5-4.00. It's fairly high ROIC of 17% should enable it to achieve a revenue growth rate of 5% or higher.

It's already sitting on a backlog of over $73 billion, and this backlog could be further boosted through satellite contracts for its space system business.

It has a relatively low long-term debt to capitalisation of 61% in comparison to many of its peers whose number's surge past the 90% mark.

It generates a huge amount of cash flow; for the first 3 quarters of 2011 operating cash flow stands at $3.03 billion and could top the $3.6 billion mark. It also sports a very large levered free cash flow of $2.76 billion.

A vast majority of the historical data (key ratios) was provided by Zacks.com. This article contains a lot of key ratios and would be best for investors to get a handle on some of these ratios as they could prove to be very useful in terms of spotting potential winners.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A pay out ratio over 100% indicates that the company is paying out more money to shareholders, then they are making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever; if your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios.

Debt to Equity Ratio is found by dividing the company's total amount of long-term debt (debts with interest rates that have a maturity longer than one year) by the total amount of equity. A debt to equity ratio of 0.5 tells us that the company is using 50 cents of liabilities in addition to each $1 dollar of shareholders equity in the business. There is no fixed ideal number as it depends on the industry the company is in. However, in general a ratio under 1 is acceptable and ideally it should be in the 0.5-0.6 ranges.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardising their future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa; lower ratios are generally more attractive. If a company generated 400 million in cash flow and then spent 100 million on capital expenditure, then its free flow is $300 million. If the share price is 100 and the free cash flow per share are $5, then company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry; this gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to

Quick ratio or acid -test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities.

Company: Lockheed Martin (LMT)

Basic Key ratios

  • Percentage Held by Insiders = 1.05
  • Market Cap ($mil) = 28316
  • Number of Institutional Sellers 12 Weeks = N/A
  • 3 Month % Chg Short Interest = N/A

Growth

  • Net Income ($mil) 12/2011 = 2655
  • Net Income ($mil) 12/2010 = 2926
  • Net Income ($mil) 12/2009 = 3024
  • 12mo Net Income this Q/ 12mo Net Income 4Q's ago = -9.26
  • Q Net Income this Q/ same qtr yr ago = -30.52
  • EBITDA ($mil) 12/2011 = 4782
  • EBITDA ($mil) 12/2010 = 5012
  • EBITDA ($mil) 12/2009 = 5392
  • Net Incm Rpt Qtr ($mil) = 683
  • Anl Net Incm this Yr/ Net Incm last Yr = -9.26
  • Cash Flow ($/sh) 12/2011 = 11.1
  • Cash Flow ($/sh) 12/2010 = 9.76
  • Cash Flow ($/sh) 12/2009 = 10.26
  • Sales ($mil) 12/2011 = 46499
  • Sales ($mil) 12/2010 = 45803
  • Sales ($mil) 12/2009 = 45189

Dividend history

  • Div Yield = 4.57
  • Div Yld 5 Yr Avg 12/2011 = 2.78
  • Div Yld 5 Yr Avg 09/2011 = 2.62
  • Annual Dividend 12/2011 = 3.25
  • Annual Dividend 12/2010 = 2.64
  • Forward Yield = 4.57
  • Div 5yr Growth 12/2011 = 21.79
  • R-squared Div Growth 12/2011 = 0.94
  • R-squared Div Growth 09/2011 = 0.94

Dividend sustainability

  • Payout Ratio 09/2011 = 0.37
  • Payout Ratio 06/2011 = 0.4
  • Payout Ratio 5 Yr Avg 12/2011 = 0.31
  • Payout Ratio 5 Yr Avg 09/2011 = 0.3
  • Payout Ratio 5 Yr Avg 06/2011 = 0.29
  • Change in Payout Ratio = 0.18

It has a relatively low pay out ratio and generates huge amounts of cash so it should easily be able to maintain its dividend payments for years to come.

Performance

  • % Ch Price 52 Wks Rel to S&P 500 = 6.05
  • Std Dev Target Price Est = 9.98
  • Avg EPS Surprise Last 4 Qtr = 13.4
  • EPS % Change F2/F1 = 6.37
  • Next 3-5 Yr Est EPS Gr rate = 7.38
  • Std Dev 3-5 Yr Est EPS Gr rate = 1.89
  • EPS Gr Q(1)/Q(-3) = -106.3
  • 5 Yr Hist EPS Gr 12/2011 = 4.52
  • 5 Yr Hist EPS Gr 09/2011 = 5.61

Projected EPS growth

  • ROE 5 Yr Avg 12/2011 = 61.34
  • ROE 5 Yr Avg 09/2011 = 57.81
  • ROE 5 Yr Avg 06/2011 = 55.07
  • Return on Investment 12/2011 = 32.66
  • Return on Investment 09/2011 = 31.8
  • Return on Investment 06/2011 = 30.87

EPS Surprises Chart

Financial Strength

  • Debt/Tot Cap 5 Yr Avg 12/2011 = 50.45
  • Debt/Tot Cap 5 Yr Avg 09/2011 = 48.07
  • Debt/Tot Cap 5 Yr Avg 06/2011 = 46.39
  • Current Ratio 12/2011 = 1.16
  • Current Ratio 09/2011 = 1.21
  • Current Ratio 06/2011 = 1.16
  • Curr Ratio 5 Yr Avg = 1.12
  • Quick Ratio = 0.96
  • Cash Ratio = 0.46
  • Interest Coverage 12/2011 = 11.28
  • Interest Coverage 09/2011 = 11.66
  • Interest Coverage 06/2011 = 11.82

Valuation

  • Book Value Qtr ($/sh) 12/2011 = 3.09
  • Book Value Qtr ($/sh) 09/2011 = 8.77
  • Book Value Qtr ($/sh) 06/2011 = 9.41
  • Anl EPS before NRI 12/2011 = 8.23
  • Anl EPS before NRI 12/2010 = 7.26
  • Anl EPS before NRI 12/2009 = 7.78
  • Anl EPS before NRI 12/2008 = 7.72
  • Anl EPS before NRI 12/2007 = 6.84
  • Price/ Book = 28.29
  • Price/ Cash Flow = 7.88
  • Price/ Sales = 0.61
  • EV/EBITDA 12 Mo = 6.52
  • P/E/G F1 = 1.51
  • Q1 Std Dev/ Consensus = 0.03
  • R-squared EPS Growth 12/2011 = 0.52
  • R-squared EPS Growth 09/2011 = 0.54
  • P/E F1/ LT EPS Gr = 1.51
  • Std Dev Cons Current Qtr = 0.05
  • Median Est Next Qtr = 1.96
  • # Anlst in Cons Q3 = 17

Related Companies (Peer Group)

Company : Boeing Co (BA)

Basic Key ratios

  • Percentage Held by Insiders = 0.78
  • Market Cap ($mil) = 55705
  • # of Ins Sellers 12 Weeks = 1
  • 3M % Chg Short Interest = n/a

Growth

  • Net Income ($mil) 12/2011 = 4018
  • Net Income ($mil) 12/2010 = 3307
  • Net Income ($mil) 12/2009 = 1312
  • Cash Flow ($/sh) 12/2011 = 7.12
  • Cash Flow ($/sh) 12/2010 = 6.59
  • Cash Flow ($/sh) 12/2009 = 4.15
  • Sales ($mil) 12/2011 = 68735
  • Sales ($mil) 12/2010 = 64306
  • Sales ($mil) 12/2009 = 68281

Dividend history

  • Div Yield = 2.35
  • Div Yld 5 Yr Avg 12/2011 = 2.55
  • Annual Dividend 12/2011 = 1.68
  • frwd yld = 2.35
  • Div 5yr Growth 12/2011 = 4.06

Dividend sustainability

  • Payout Ratio 09/2011 = 0.37
  • Payout Ratio 06/2011 = 0.4
  • Payout Ratio 5 Yr Avg 12/2011 = 0.57

Performance

  • EPS Gr Q(1)/Q(-3) = -123.59
  • 5 Yr Hist EPS Gr 12/2011 = -5.99
  • ROE 5 Yr Avg 12/2011 = 91.98
  • ROE 5 Yr Avg 09/2011 = 89.03
  • Return on Investment 12/2011 = 24.01
  • Debt/Tot Cap 5 Yr Avg 12/2011 = 65.94

Financial Strength

  • Current Ratio 09/2011 = 1.23
  • Curr Ratio 5 Yr Avg = 1
  • Quick Ratio = 0.43
  • Cash Ratio = 0.27
  • Interest Coverage 12/2011 = 10.13
  • Interest Coverage 09/2011 = 11.73
  • Interest Coverage 06/2011 = 10.38

Company : Genl Dynamics (GD)

Basic Key ratios

  • Percentage Held by Insiders = 6.2
  • Market Cap ($mil) = 25035
  • # of Ins Sellers 12 Weeks = 1
  • 3M % Chg Short Interest = n/a

Growth

  • Net Income ($mil) 12/2011 = 2526
  • Net Income ($mil) 12/2010 = 2624
  • Net Income ($mil) 12/2009 = 2394
  • Cash Flow ($/sh) 12/2011 = 9.17
  • Cash Flow ($/sh) 12/2010 = 8.46
  • Cash Flow ($/sh) 12/2009 = 7.7
  • Sales ($mil) 12/2011 = 32677
  • Sales ($mil) 12/2010 = 32466
  • Sales ($mil) 12/2009 = 31981

Dividend history

  • Div Yield = 2.67
  • Div Yld 5 Yr Avg 12/2011 = 2.19
  • Annual Dividend 12/2011 = 1.83
  • frwd yld = 2.67
  • Div 5yr Growth 12/2011 = 13.29

Dividend sustainability

  • Payout Ratio 09/2011 = 0.26
  • Payout Ratio 06/2011 = 0.27
  • Payout Ratio 5 Yr Avg 12/2011 = 0.24

Performance

  • EPS Gr Q(1)/Q(-3) = -104.71
  • 5 Yr Hist EPS Gr 12/2011 = 9.79
  • ROE 5 Yr Avg 12/2011 = 20.15
  • ROE 5 Yr Avg 09/2011 = 20.1
  • Return on Investment 12/2011 = 15.9
  • Debt/Tot Cap 5 Yr Avg 12/2011 = 18.75

Financial Strength

  • Current Ratio 09/2011 = 1.34
  • Curr Ratio 5 Yr Avg = 1.31
  • Quick Ratio = 1.17
  • Cash Ratio = 0.31
  • Interest Coverage 12/2011 = 24.97
  • Interest Coverage 09/2011 = 26.05
  • Interest Coverage 06/2011 = 31.94

Company : Northrop Grummn (NOC)

Basic Key ratios

  • Percentage Held by Insiders = 0.16
  • Market Cap ($mil) = 15627
  • # of Ins Sellers 12 Weeks = N/A
  • 3M % Chg Short Interest = n/a

Growth

  • Net Income ($mil) 12/2011 = 2118
  • Net Income ($mil) 12/2010 = 2053
  • Net Income ($mil) 12/2009 = 1686
  • Cash Flow ($/sh) 12/2011 = 9.09
  • Cash Flow ($/sh) 12/2010 = 8.81
  • Cash Flow ($/sh) 12/2009 = 7.36
  • Sales ($mil) 12/2011 = 26412
  • Sales ($mil) 12/2010 = 34757
  • Sales ($mil) 12/2009 = 33755

Dividend history

  • Div Yield = 3.34
  • Div Yld 5 Yr Avg 12/2011 = 2.84
  • Annual Dividend 12/2011 = 1.97
  • frwd yld = 3.34
  • Div 5yr Growth 12/2011 = 7.57

Dividend sustainability

  • Payout Ratio 09/2011 = 0.34
  • Payout Ratio 06/2011 = 0.34
  • Payout Ratio 5 Yr Avg 12/2011 = 0.32

Performance

  • EPS Gr Q(1)/Q(-3) = -145.67
  • 5 Yr Hist EPS Gr 12/2011 = 6.14
  • ROE 5 Yr Avg 12/2011 = 12.4
  • ROE 5 Yr Avg 09/2011 = 12.11
  • Return on Investment 12/2011 = 11.66
  • Return on Investment 09/2011 = 10.39
  • Debt/Tot Cap 5 Yr Avg 12/2011 = 21.65

Financial Strength

  • Current Ratio 09/2011 = 1.34
  • Curr Ratio 5 Yr Avg = 1.13
  • Quick Ratio = 1.12
  • Cash Ratio = 0.64
  • Interest Coverage 12/2011 = 15.76
  • Interest Coverage 09/2011 = 14.25
  • Interest Coverage 06/2011 = 15.87

Company : Raytheon Co (RTN)

Basic Key ratios

  • Percentage Held by Insiders = 0.57
  • Market Cap ($mil) = 17142
  • # of Ins Sellers 12 Weeks = 4
  • 3M % Chg Short Interest = n/a

Growth

  • Net Income ($mil) 12/2011 = 1866
  • Net Income ($mil) 12/2010 = 1840
  • Net Income ($mil) 12/2009 = 1935
  • Cash Flow ($/sh) 12/2011 = N/A
  • Cash Flow ($/sh) 12/2010 = 6.93
  • Cash Flow ($/sh) 12/2009 = 6.05
  • Sales ($mil) 12/2011 = 24857
  • Sales ($mil) 12/2010 = 25183
  • Sales ($mil) 12/2009 = 24881

Dividend history

  • Div Yield = 3.47
  • Div Yld 5 Yr Avg 12/2011 = 2.56
  • Div Yld 5 Yr Avg 09/2011 = 2.46
  • Annual Dividend 12/2011 = 2.1
  • Annual Dividend 12/2010 = 1.13
  • frwd yld = 3.47
  • Div 5yr Growth 12/2011 = 12.91
  • Div 5yr Growth 12/2011 = 12.91

Dividend sustainability

  • Payout Ratio 09/2011 = 0.31
  • Payout Ratio 06/2011 = 0.32
  • Payout Ratio 5 Yr Avg 12/2011 = 0.29
  • Payout Ratio 5 Yr Avg 09/2011 = 0.3
  • Payout Ratio 5 Yr Avg 06/2011 = 0.3
  • Change in Payout Ratio = 0.01

Performance

  • % Ch Price 52 Wks Rel to S&P 500 = -4.01
  • EPS % Change F2/F1 = 12.87
  • EPS Gr Q(1)/Q(-3) = -110.83
  • 5 Yr Hist EPS Gr 12/2011 = 15.55
  • 5 Yr Hist EPS Gr 09/2011 = 16.56
  • ROE 5 Yr Avg 12/2011 = 16.72
  • ROE 5 Yr Avg 09/2011 = 16.23
  • Return on Investment 12/2011 = 14.84
  • Debt/Tot Cap 5 Yr Avg 12/2011 = 20.9

Financial Strength

  • Current Ratio 12/2011 = 1.52
  • Current Ratio 09/2011 = 1.41
  • Current Ratio 06/2011 = 1.51
  • Curr Ratio 5 Yr Avg = 1.5
  • Quick Ratio = 1.46
  • Cash Ratio = 1.46
  • Interest Coverage 12/2011 = 19.24
  • Interest Coverage 09/2011 = 17.46
  • Interest Coverage 06/2011 = 15.91

Conclusion

We like LMT for the following reasons

  1. Five year dividend average of roughly 3%
  2. Five year dividend growth rate of 21%
  3. A sustainable payout ratio of 31%
  4. A ROE of 113%
  5. Net income and operating cash flow have generally been trending upwards for the past four years.
  6. Though it carries about 6 billion in Debt, it has a very good interest ratio of 11.8, which means that it covers interest expenses 11.8 times with operating profits
  7. A decent current ratio of 1.2
  8. Has consecutively increased its dividends for roughly 9 years
  9. Has a very healthy free levered free cash flow of $2.76 billion
  10. The dividend is easily covered by earnings and levered free cash flow.
  11. Its five historical growth rates for sales and earnings per are 3.6%, and 5.6% respectively.
  12. It has an impressive inventory turnover of 20 times TTM as of the third quarter of 2011; in comparison the industry average is 3.5-4.00.
  13. LMT is sitting on a back of over $73 billion and this back log could be further boosted through satellite contracts for its space system business.
  14. It has a relatively low long term debt to capitalisation of 61% in comparison to many of its peers whose numbers surge past the 90% mark.
  15. It generates huge amount of cash flow; for the first 3 quarters of 2011 operating cash flow stands at $3.03 billion and could top the $3.6 billion mark. It also sports a very large levered free cash flow of $2.76 billion.
  16. 100K invested in LMT for 10 years would have grown to 208K

The markets are rather overbought and we would wait for a strong pullback before committing money to this market.

EPS surprise chart, EPS growth and a large portion of the historical data used here was obtained from zacks.com. All dividend history charts sourced from dividata.com

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is very important that you check the finer details, do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: Lockheed Martin: A Great Long-Term Dividend Play