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In the learning to fish series, investors are provided with suggested guidelines for spotting a potential candidate. One candidate is selected that more or less fulfills all the listed requirements. This example is provided in the hopes that it will impart some knowledge and understanding to those who are new to the field of investing. The guidelines can be accessed by clicking on "Our Suggested Guidelines When Searching For New Investment Ideas." These suggestions are not absolute rules. They are just guidelines that can be modified to suit your own investment needs.

Reasons to be bullish on Lockheed Martin (LMT):

  • It is sitting on an order backlog of roughly $76.6 billion at the end of the first quarter in 2012.
  • It has one of the strongest balance sheets among its peers, and it continues to generate strong cash flow. In 2011, it generated roughly $4.3 billion in cash flow. It ended the first quarter with cash and cash equivalents of $3.5 billion and $1.5 billion revolving credit facility.
  • A strong levered cash flow of $2.01 billion.
  • A good quarterly earnings growth rate of 26%.
  • A relative strength score of 73 out of a possible 100.
  • A strong five year cash flow rate of $9.89.
  • It has strong institutional support -- percentage held by institutions is 90%.
  • A low beta of 0.64 indicates that it's not a very volatile stock.
  • Cash flow per share increased from $10.68 in 2009 to $11.76 in 2011.
  • Sales rose from $45.1 billion in 2009 to $46.4 billion in 2011.
  • Annual EPS before NRI rose from $6.84 in 2007 to $8.23 in 2011.
  • A decent yield of 4.86%.
  • A projected year-over-year growth rate of 7.4% for 2013.
  • A good five-year dividend growth rate of 22.41%.
  • A manageable payout ratio of 46%.
  • A good retention ratio of 54%.
  • A strong five-year ROE average of 66%.
  • An interest coverage ratio of 10.88.
  • A projected three- to five-year EPS growth rate of 5%.
  • A strong free cash flow yield of 8.06%.

Areas of concern:

  • A very high long-term debt-to-equity ratio of 4.11.
  • A weak quick ratio.
  • A projected year-over-year growth rate of -4.08% for 2012.
  • The euro crisis could have a stronger than expected impact on the U.S. economic outlook, which could trigger further cutbacks in the defense budget. At the moment, this news appears to be fully priced into the stock. On the flip side, though, Lockheed is trading at discount to its peers.


Lockheed Martin's levered free cash flow is $2.01 billion.

Brief Overview

  1. Percentage Held by Insiders = 1.13
  2. Relative Strength 52 weeks = 73
  3. Cash Flow Five-year Average = 9.89
  4. Profit Margin = 5.9%
  5. Operating Margin = 8.33%
  6. Quarterly Revenue Growth = 6.3%
  7. Quarterly Earnings Growth = 26%
  8. Operating Cash Flow = 2.99B
  9. Beta = 0.64
  10. Percentage Held by Institutions = 90.2%
  11. Short Percentage of Float = 5.2%

Growth

  1. Net Income ($mil) 12/2011 = 2655
  2. Net Income ($mil) 12/2010 = 2878
  3. Net Income ($mil) 12/2009 = 2973
  4. Net Income Reported Quarterly ($mil) = 668
  5. EBITDA ($mil) 12/2011 = 4993
  6. EBITDA ($mil) 12/2010 = 5175
  7. EBITDA ($mil) 12/2009 = 5504
  8. Cash Flow ($/share) 12/2011 = 11.76
  9. Cash Flow ($/share) 12/2010 = 10.34
  10. Cash Flow ($/share) 12/2009 = 10.68
  11. Sales ($mil) 12/2011 = 46499
  12. Sales ($mil) 12/2010 = 45803
  13. Sales ($mil) 12/2009 = 45189
  14. Annual EPS before NRI 12/2007 = 6.84
  15. Annual EPS before NRI 12/2008 = 7.72
  16. Annual EPS before NRI 12/2009 = 7.78
  17. Annual EPS before NRI 12/2010 = 7.26
  18. Annual EPS before NRI 12/2011 = 8.23

Dividend history

  1. Dividend Yield = 4.86
  2. Dividend Yield Five-Year Average 03/2012 = 2.94
  3. Dividend Five-Year Growth 03/2012 = 22.41

Dividend sustainability

  1. Payout Ratio 03/2012 = 0.46
  2. Payout Ratio Five-Year Average 03/2012 = 0.32

Performance

  1. Next Three- To Five-Year Estimate EPS Growth rate = 5.04
  2. Five-Year History EPS Growth 03/2012 = 3.83
  3. ROE Five-Year Average 03/2012 = 66.49
  4. ROE Five-Year Average 12/2012 = 61.55
  5. Return on Investment 03/2012 = 34.82
  6. Debt/Total Cap Five-Year Average 03/2012 = 52.62
  7. Current Ratio 03/2012 = 1.19
  8. Current Ratio 12/2011 = 1.16
  9. Current Ratio Five-Year Average = 1.12
  10. Quick Ratio = 0.96
  11. Cash Ratio = 0.46
  12. Interest Coverage Quarterly = 10.88

Conclusion

Long-term investors can use strong pullbacks to open up positions in stocks they would not mind owning for the long haul. A great way to get into a stock at a price of your choosing is to sell puts at strikes you would not mind owning the stock at. Investors willing to take on a bit more risk might find the following article to be of interest: "Alpha Natural Resources, 1 Of 3 Candidates Trading Below Book."

Sources: EPS and price vs. industry charts obtained from Zacks.com. A major portion of the historical data used in this article was obtained from Zacks.com. Consensus estimate analysis table sourced from Reuters.com. Ycharts data sourced from Ycharts.com. 2011 net sales mix chart and 2011 operating profit mix chart sourced from Zacks.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 imperative that you 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: Time To Get In Or Get Out?