Lockheed Martin (LMT) is an advanced technology manufacturing company that specializes in defense and other related fields. Lockheed is the company behind the F22 fighter plane, as well as anti-missile defense systems. The company has the distinction of being the largest provider of IT services and training to the United States government. The company has four primary business operations:
- Aeronautics: Tactical aircraft development
- Electric Systems: Missiles, systems, platforms, simulation, and training
- Information Systems & Global Solutions: Government and commercial IT
- Space Systems: Commercial and government satellites
The stock has essentially remained in a tight range between the high 60s and low 80s since the first quarter of 2009, but has been on a rollercoaster ride recently. In April, LMT set a new 52-week high of $92 before tumbling back into low $80s two months later only to regain its year-high. If Lockheed can breakthrough its old high, it could rally further to support a P/E in the low teens but there is always concerns regarding Lockheed when the military budget is on the chopping block. With the super committee's failure to make a decision, defense spending is facing $600B in cuts, which could spur further downward pressure.
The outlook is somewhat bleak as a recent report by the Center for Strategic and
Budgetary Assessments expects the $56.5B in Pentagon cuts for fiscal year 2013. These reductions cannot reduce pay for military personnel so the brunt will fall upon defense companies such as Lockheed. Fortunately the report indicates that service providers would face larger decreases than weapons producers so Lockheed may be higher on the priority list. This is precisely the type of looming pessimism that can force the stock price in a downward trend.
Due to the nature of operations, Lockheed is highly leveraged to government spending and Goldman recently estimated that the company has 97% exposure to "government agencies." Despite the potential decline in government spending, investors can collect a respectable dividend that has been exhibiting decent growth in the past decade. Not only does Lockheed have a strong yield, the company is dedicated to repurchasing shares and repurchased over $400M shares so far this year. Sales growth continues to be slow across most divisions with Information Systems actually contracting. The lone bright spot was Space Systems, which increased by 18%. Overall, I consider Lockheed to be a slightly above-average company; however, the investment thesis is highly reliant on politics, and requires more monitoring than most dividend leaders. Lockheed's management has been proactive in attempting to diversify the company, which is commendable, but it is difficult to overhaul a company with such a storied history.
While Lockheed is still affordably priced with a forward P/E of 11.2, I believe the company will encounter difficulty appreciating materially higher. Shares have not traded at this level since Fall 2008 pre-Lehman and I believe you have ten-to-fifteen points of downside risk compared to five-to-ten points of upside potential. Considering the company's 3.3% Q/Q growth rate, this is the type of business that will encounter difficulty expanding its P/E. The most compelling reason to buy Lockheed is the 4.26% yield and the recent flight to high yielding equities could keep Lockheed in the $90s; however, there is too much political risk for me to wholeheartedly get behind this stock.