Source: Lockheed Martin
From an overarching perspective, Lockheed (LMT) appears to be an incredibly well-positioned company awash with strong competitive advantages. As the largest military defensive contractor in the world, LMT exhibits unwavering competitive advantages ranging from a monopoly on government defense spending, inseparable lobbying and congressional ties, an immunity from market forces, as well as unparalleled technology and human capital. Such venerable business characteristics and sustained operational outperformance have not gone unnoticed. Over the past five years, LMT has experienced market-beating capital appreciation of 17% a year. This article delineates my bullish investment thesis on LMT discussing business strengths, growth vectors, and the stock's current valuation.
LMT is a stock that unequivocally meets Warren Buffet's investment criteria as a stock to hold forever. LMT displays innumerable business advantages that reinforce a highly stable business largely unaffected by free-market forces. With $54 billion in annual revenues, LMT is one of the largest players in the aerospace, defense, security, and advanced technologies space. The company operates in an oligopoly market with few competing firms that rival the LMT's scale of operations and extensive clientele base. LMT has forged longstanding and inseparable relationships with governments and private security firms who are driven by the need for continuity of service, equipment, and operational stability (ex. LMT has worked for the U.S government for decades upon decades). LMT boasts unparalleled intellectual, monetary, and product capital, allowing the company to disqualify various competitors who are simply unable to compete and perform on LMT's level. From a revenue perspective, LMT's operations are centralized around inelastic demand for global security and military defense needs. Given that security and defense solutions are subject to unwavering demand, defense enterprises such as LMT benefit from consistent revenue expansion, allowing the company to reliably sustain and increase revenues in spite of market vagaries. Also, mankind's unwavering inclination for conflict assures continued preventative and corrective defense expenditures in both peaceful and tumultuous geopolitical environments alike.
LMT receives an astronomical portion of its revenues from the U.S government, with government-related sales accounting for 69% of total revenues. Although some may interpret LMT's significant revenue concentration as disadvantageous, in reality, it reinforces the reliability and predictability of the company's revenues. With defense budgetary allocations close to $700 billion a year, the United States military budget prevails as the largest in the world, eclipsing the next six largest foreign budgets combined. An inclination for formidable military spending in addition to LMT's extensive lobbying presence in Washington, assures strategic support (from a policy perspective) for the company's interests. LMT has a prominent corporate lobbying presence, pouring over $13 million a year into Washington to sway political influence. Additionally, LMT's more than 100,000 employees distributed throughout the 50 states ensure favorable political contingencies given the company's substantial employment presence. The lack of competitive alternatives provides LMT with pricing autonomy allowing the company to raise prices with impunity. Additionally, LMT's revenues are derived from multiple operating segments ranging from aerospace and defense, information technology, and space/emerging technologies, assuring a diverse product portfolio that caters to multiple governmental initiatives.
In terms of revenue prospects, LMT's positioning is secure on both a short and long-term basis. The current political landscape provides a favorable operating environment for LMT. The House approved $684 billion in appropriations for military and defense spending for fiscal year 2019, up about 15% since 2017's $590 billion in appropriations. Furthermore, LMT's long-term growth prospects are stable given the company's $110 billion in backlog orders, LMT's 400 billion dollar F-35 development program, and the company's new nuclear fusion technologies. LMT's F-35 plane program is one of the most ambitious and expensive military programs ever created; the company's objective to build 3,000 military aircraft will prove an enduring tailwind for decades. Additionally, LMT's compact nuclear fusion system promises to deliver significant monetary rewards. The company is in the process of developing a portable nuclear-fusion power generation unit that has the ability to power 100,000 homes.
From an investment returns perspective, LMT elicits strong appeal. The company has delivered market-crushing returns. From a total price returns perspective, LMT has consistently outperformed the S&P 500 benchmark index. In addition to formidable capital appreciation, LMT boasts a pristine dividend track record; the company has consistently increased its dividend for the past 16 years and the current yield situated at 2.91% is very attractive. In spite of a high dividend, LMT exhibits only a moderate payout ratio of 51%, reinforcing a stable dividend growth trajectory. Overall, LMT's sustained track record of share price performance coupled with consistently increasing dividends, reinforces a promising return on invested capital. At present levels, LMT remains an attractive buy. Based on a discounted cash flow valuation, the company is fairly valued as the current share price of $300 is only slightly above the future cash flow value of $292. LMT definitely commands a much higher premium than its current valuation, enabling good short-term upside potential.
LMT is an amazing investment that will offer shareholders significant monetary rewards over the long-run. The company's unparalleled competitive advantages and stable underlying business illuminate a very compelling life-long investment holding. Over the short-term, I anticipate positive share price movement due to LMT's fair valuation, steady and defensive business, and the company's encouraging future prospects.
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Disclaimer: Please note that this is not a solicitation to buy or sell any security. Data is for illustrative purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are not tailored to individual portfolio needs nor investment objectives. The assessment of a given security is based on my own model portfolio, which is presented solely for educational purposes. Yanni Lodato is an individual investor and author, not an investment adviser. Readers should always engage in further research and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or qualified attorney before making any investment decisions.
Disclosure: I am/we are long LMT. 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.