RIA Analyst's  Instablog

RIAanalyst.com: This week we are presenting an investment case for Lockheed Martin Corp (LMT), as of  9/26/2009.

Company overview: “Lockheed Martin moves product in times of crisis — the company is the world’s #1 military contractor (ahead of Boeing and Northrop Grumman). Lockheed is firmly on the defense/government side of the aerospace industry; in fact, the US government accounts for about 85% of sales. This reliance on the US government is a double-edged sword: Lockheed can largely avoid turbulence in the commercial aerospace sector, but the company is vulnerable to military spending cuts. The Electronic Systems and Information Systems & Global Services segments account for more than half of Lockheed’s sales.” (source: AOL Money & Finance)

Valuation: We are conservatively projecting FY 2010 Revenue between $46,860m and $47,980m versus trailing 12 month revenues of $42,570m. Shares outstanding are projected to be between 0,360m and 0,417m, which gives us a range of between 112.3 and 133.4 dollars revenue per share in 2010. Taking a forward, normalized Free Cash Flow Margin (% of Revenue)  between 8.6% and 9.1%, based on historical trend, we get between $9.68 and $12.08 Free Cash Flow (discretionary cash earnings after interest, tax and capital expenditures) per share in 2010. With a current share price of $77.9 that’s a forward free cash flow yield of between 12.4% and 15.5%. If we go one step further, adding an expected 30yr forward growth rate of between 5.1% and 6.3%,  that gives us an expected annualized buy-and-hold return (Equity IRR) of between 17.6% and 21.8%. This strikes us as an attractive return proposition for this stock in this market (see attachment for more detail).

Intangibles: Lockheed is the largest defense contractor in the world, has a wide competitive moat, a history of steadily increasing revenues, free cash flows, dividends and share repurchases, and has recently boosted its dividend and repurchase programs.   Lockheed (LMT -9% YTD) has significantly trailed the S&P 500 (SPY +12% YTD) and Defense & Aerospace group (PPA +9% YTD), which we believe creates an excellent buying opportunity for the patient investor. Despite near-term concerns about possible military budget cuts, or challenges around specific projectects, we beleive the defense industry will continue to grow in the long run, with Lockheed getting at least its fair share of that growth. The stock trades at less than 10x forward earnings, and the company has about $7/share in cash-on-hand. You can see a recent video of the Lockheed CEO, Robert Stevens, here.

Benchmarks: PPA (Defence & Aerospace), XLI (Industrials), SPY (S&P 500)

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Details: Formatted PDF

Data sources: Morningstar, Yahoo, Advfn

Disclaimer: This information is presented for general purposes only and should not be construed as being the primary basis for an investment decision, or as reflecting recommendations taking into account your individualized requirements. As always, consult your financial advisor before making any decision based on this or any other information. (full disclaimer)

Disclosure: Author has no position in LMT

RIAanalyst.com: This week we are presenting an investment case for EMC Corp (EMC), as of  9/19/2009.

Company overview: “EMC bytes data storage problems and swallows every bit. The company is a leading provider of RAID (redundant array of independent disks) storage systems. Banks, manufacturers, Internet service providers, retailers, and government agencies use EMC’s systems to store and retrieve massive amounts of information. It also markets a line of network attached storage file servers, and a wide array of software designed to manage, protect, and share data. EMC is the majority owner of virtualization specialist VMware, and its RSA division provides security software. It sells its products directly and through distributors and manufacturers. Its biggest resale partner, Dell, sells co-branded EMC systems.” (source: AOL Money & Finance)

Valuation: We are conservatively projecting FY 2010 Revenue between $14,450m and $15,060m versus trailing 12 month revenues of $13,725m. Shares outstanding are projected to be between 1,952m and 2,146m, which gives us a range of between 6.7 and 7.7 dollars revenue per share in 2010. Taking a forward, normalized Free Cash Flow Margin (% of Revenue)  between 20.5% and 25.3%, based on historical trend, we get between $1.38 and $1.95 Free Cash Flow (discretionary cash earnings after interest, tax and capital expenditures) per share in 2010. With a current share price of $17.0 that’s a forward free cash flow yield of between 8.1% and 11.5%.  If we go one step further, adding an expected 30yr forward growth rate of between 5.2% and 6.4%, that gives us an expected annualized buy-and-hold return (Equity IRR) of between 13.3% and 17.9%. This strikes us as an attractive return proposition for this stock in this market (see attachment for more detail).

Intangibles: We believe that as the shift from on-premise to “cloud” computing and data storage continues, the data-storage industry will grow significantly for the foreseeable future. As the leader in data virtualization, EMC should outperform within that already attractive environment. Management seems competent, and EMC has been a rumored takeover target for CISCO. You can see a recent video of EMC CEO/Chairman speaking at “EMC World 2009″ here.

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Details: Formatted PDF

Data sources: Morningstar, Yahoo, Advfn

Disclaimer: This information is presented for general purposes only and should not be construed as being the primary basis for an investment decision, or as reflecting recommendations taking into account your individualized requirements. As always, consult your financial advisor before making any decision based on this or any other information. (full disclaimer)

Disclosure: Author is long EMC