Disappointment - The 10 Foot Pole Still Not Reaching Lockheed Martin

| About: Lockheed Martin (LMT)

Summary

The P/E multiple is at a relative high multiple.

The dividend payout ratio is trending upwards near 50%.

Capex has slowed down in the past 5 years.

Recently I've been hunting down fantastic investments to add to my portfolio and have found a few. In the past few months, I have found both Trinity Industries (NYSE:TRN), article found here and Boeing (NYSE:BA), article found here. I've been very happy to add these names to my portfolio and am waiting patiently, it's a time for me to let my money work for me. While I wait however, I continue to look and look aggressively.

Recently I've researched Lockheed Martin (NYSE:LMT) and have been appalled by what the market is offering. Since 2011, the shares of LMT have delivered for their owners fabulously. Going forward however, it may be a different story. As always with investing, we want to evaluate what we are paying vs. what we are getting. In the case of LMT, we need to look back to what the normal multiples are as this is a value story and not a growth story. Let's take a look at the most basic P/E numbers and total earnings along with the number of shares outstanding. The actual totals may be a little different due to rounding. The numbers in bold are estimates pulled from Value Line.

 

Share Price

Shares Outstanding

Price / Earnings

EPS

Total Earnings

 

High

Low

 

High

Low

   
               

Year 2016

228.00

200.47

295.00

19.24

16.92

11.85

3495.75

Year 2015

227.90

181.90

303.00

19.89

15.87

11.46

3472.38

Year 2014

198.70

144.70

314.00

17.73

12.91

11.21

3519.94

Year 2013

150.00

85.90

319.00

15.67

8.98

9.57

3052.83

Year 2012

95.90

79.10

321.00

11.47

9.46

8.36

2683.56

Year 2011

82.40

66.40

323.37

10.54

8.49

7.82

2528.75

Click to enlarge

With the total earnings beginning to find a ceiling, it may be time to reevaluate an existing long position. Let's be clear however, this is not a company to short sell. Lockheed Martin is a fantastic company which I would like to own for the long term. I do however have to buy it at the right price.

Given its current dividend yield of approximately 3%, I would be looking to purchase at a substantially lower price. Let's take a look at the dividend yield and payout ratio. Again, the bold numbers are estimates.

     

Annual Dividend

     

Payout Ratio %

 

Share Price

Yield as a %

EPS

 

High

Low

 

High

Low

   

Year 2016

228.00

200.47

6.60

2.89

3.29

11.85

55.70

Year 2015

227.90

181.90

6.15

2.70

3.38

11.46

53.66

Year 2014

198.70

144.70

5.49

2.76

3.79

11.21

48.97

Year 2013

150.00

85.90

4.78

3.19

5.56

9.57

49.95

Year 2012

95.90

79.10

4.15

4.33

5.25

8.36

49.64

Year 2011

82.40

66.40

3.25

3.94

4.89

7.82

41.56

Click to enlarge

Given the previous P/E ratios as low as 9 times, I am happy to take the plunge at 10 times earnings, which currently translates to about $120 per share, meaning a yield of 5.5%, in line with those investors who bought in 2012 and 2013. I wish I were one of them.

Just as I did in the Boeing article, LMT needs to be viewed through the Porter goggles to see if there is potential of excess profits. Let me cut to the chase: There is huge potential for excess profit. Given that LMT is a company which partners with the US Government to aid in National Defense and also operates in the aerospace industry, it is not something to be entrusted to anyone, even with the right expertise. It is a company which cannot be recreated.

Threat of New Entrants

Given the sensitive nature of the company's operation, it is not possible for a foreign competitor to displace LMT in certain contracts (defense contracts). The aerospace division is also a very difficult to take away from LMT given their expertise and long term relationships with their customers.

Threat of Substitutes

Given the highly specialized nature of the business segments of LMT, there is not (in many cases) a substitute which is available. Although certain substitutes which may exist, the difference may be significantly material for those on the ground. The alternatives may just not be good enough.

Bargaining Power of Customers

Given the few suppliers of LMTs products and services (in addition to the highly sensitive nature of their operations), it will be very difficult for their customers to go elsewhere. In addition, the technology and patents owned by LMT are not transferable.

Bargaining Power of Suppliers

Although in certain circumstances, LMT may have to pay up for certain components to add to their products, a number of products are of course manufactured in house and are therefore not subject to bargaining with suppliers.

Intensity of Competitive Rivalry

We are not selling pizza here. There are very few competitors and they certainly do not compete on price like our friendly neighborhood pizzerias. The aerospace and defense industries have a higher degree of product specialization which needs to be considered in great detail when making a purchase. Unlike ordering a pizza, an order from LMT is much more highly involved.

A Few More Things

LMT has done an excellent job in repurchasing shares in the past 5 years among the many excellent things it has done for its shareholders. As an investment, it has a relatively low beta of 0.59 (according to Google Finance) (NASDAQ:GOOG), allowing its owners to sleep very well at night. It may have gotten a little ahead of itself in terms of its current share price and earnings.

Comparing the depreciation and investments in fixed capital, the depreciation has outpaced the investments in fixed capital in the past 5 years. This is not the sign of a growing company, but is the sign of a shrinking company, or potentially a company which has been overstating its free cash flow in the past 5 years.

Conclusion

Looking back to the Boeing article, the 5 forces seem to be even more in favor for Lockheed Martin than for Boeing. The price to be paid for the upside potential however is not as evident as I like to see when sending my money out to fight in battle. At 19 times earnings and a 3% dividend yield, it may take an awful long time for my own little money men to find their way home intact or with more prisoners (gains). Lockheed Martin will remain on my watch lists, probably permanently, but I am not touching this one with a ten foot pole!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.