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I reviewed Q2 and YTD2023 results in this July 19 post. I now quickly revisit Lockheed Martin (LMT) given:
- the release of its Q3 and YTD2023 results;
- revised FY2023 outlook;
- the declaration of a dividend increase; and
- an increase in its share repurchase authorization.
Business Overview
Investors unfamiliar with LMT should review its website, Part 1 of the 2022 Form 10-K, and the 2023 Proxy Statement.
The Risk Factors section within LMT's Form 10-K provides a good overview of various risks that could impact its business, financial condition, operating results and cash flows.
Financials
Q3 and YTD2023 Results
I reference the material available in the Quarterly Results section of LMT's website.
The following is a recap of LMT's Q3 2023 results and a comparison between Q3 2022 and 2023 EPS.
Source: LMT - Q3 2023 Earnings Presentation - October 17, 2023
In Q3, CAPEX amounted to ~$0.364B. YTD2023 it has incurred $0.987B in CAPEX.
Q3 FCF of $2.527B was ~150% of net income. This was achieved in part by LMT's focus on working capital, primarily due to better collections at the end of the government fiscal year.
In the first half of FY2023, LMT returned to shareholders $2.792B or ~137% of free cash flow (FCF) through dividends (~$1.542B) and share repurchases (~$1.25B).
In the first 9 months of the current fiscal year, LMT has generated ~$4.568B in FCF and has returned ~116% to shareholders in the form of dividends and share repurchases.
Source: LMT - Q3 2023 Earnings Presentation - October 17, 2023
LMT continues to report a strong order backlog and continues to be awarded significant contracts.
- In September, Denmark's first 4 locally based F-35 aircraft were delivered. Denmark's program calls for 27 F-35A aircraft.
- In addition, in September the Czech Republic chose to become part of the global F-35 Lightning II program.
- The U.S. State Department also approved a possible $5B foreign military sale to South Korea for up to 25 F-35 Joint Strike Fighters.
- Israel also announced that it will buy an additional 25 F-35s. This will add a third squadron and increase its F-35 fleet to 75 aircraft.
Source: LMT - Q3 2023 Form 8K - October 17, 2023
In Q3, LMT delivered 30 F-35 aircraft bringing the YTD total to 80 jets. Consistent with its announcement in September, LMT continues to expect to deliver a total of 97 aircraft in 2023, all in the Technology Refresh 2 or TR2 configuration.
It is producing F-35s at a rate of ~$156B/year. Expectations are for LMT to continue at this pace while simultaneously working to finalize TR-3 software development testing. LMT continues to expect to deliver the first TR-3 configured aircraft between April - June 2024.
LMT's backlog and deliveries for the prior quarter are provided below for comparison.
FY2023 Outlook
LMT's FY2023 outlook is unchanged from that issued in July with the exception of a $2B increase in proposed share repurchases.
Source: LMT - Q3 2023 Earnings Presentation - October 17, 2023
Source: LMT - Q3 2023 Earnings Presentation - October 17, 2023
FY2024 Outlook
LMT does not yet have a formal outlook it can share with the investment community. However, barring any major setbacks, it still anticipates low single-digit sales growth. The order backlog supports a higher growth rate, but the supply chain remains constrained by extended lead times that have yet to compress.
Segment margins are expected to be relatively flat YoY.
LMT continues to set internal targets that deliver mid-single-digit growth in FCF/share.
Credit Ratings
LMT's senior unsecured domestic currency debt ratings are:
- Moody's: A2 (upgrade from A3 on August 14, 2023)
- S&P Global: A- (stable outlook)
- Fitch: A- (stable outlook)
The ratings from S&P Global and Fitch are the lowest tier of the upper-medium investment grade level; the rating assigned by Moody's is one tier higher.
All 3 ratings define LMT as having a STRONG capacity to meet its financial commitments. LMT is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
Dividend and Dividend Yield
The following are LMT's dividend yield at the time of prior reviews.
- January 25, 2022: shares were trading at ~$380 - the $2.80 quarterly dividend yielded ~3%.
- April 19, 2022: shares were trading at ~$460 - the $2.80 quarterly dividend yielded ~2.4%.
- July 19, 2022: shares were trading at ~$390 - the $2.80 quarterly dividend yielded ~2.9%.
- October 18, 2022: shares were trading at ~$432 - the $3.00 quarterly dividend yielded ~2.78%.
- January 25, 2023: shares were trading at ~$452.50 - the $3.00 quarterly dividend yielded ~2.65%.
- April 18, 2023: shares were trading at ~$501.50 - the $3.00 quarterly dividend yielded ~2.40%.
- July 18, 2023: shares were trading at ~$455.70 - the $3.00 quarterly dividend yielded ~2.63%.
- September 7, 2023: shares were trading at ~$430 - the $3.00 quarterly dividend yielded ~2.8%.
When I completed my July post, LMT was scheduled to distribute its 4th consecutive quarterly $3.00 dividend on September 22 (see dividend history). Based on recent dividend history, I forecast a $0.20/share dividend increase in mid-September. I, therefore, envisioned the next 4 quarterly dividend payments would total $12.60 ((1 x $3) + (3 x $3.20)). Using my July 18 ~$455 purchase price, the forward dividend yield was ~2.77%.
When I acquired additional shares in September @ ~$430, the forward dividend yield was ~2.93% based on my $12.60 forward dividend estimate and my purchase price.
On October 6, LMT only declared a $0.15 increase ($3.00 to $3.15) commencing with the dividend payable on December 29; the next 4 quarterly dividends will total $12.60. Using this and the current ~$446 share price, the forward dividend yield is ~2.83%.
This dividend increase marks LMT's 21st consecutive year of dividend increases.
LMT is a prolific acquirer of its shares as borne out by the reduction in the weighted average number of issued and outstanding shares in FY2011 - FY2022 (in millions rounded): 340, 328, 327, 322, 315, 303, 291, 287, 284, 281, 277.4, and 264.6. This has been further reduced to 253.6 in Q2 and 250.2 in Q3 2023.
In Q3, LMT repurchased 6.7 million shares for $3.0B pursuant to accelerated share repurchase (ASR) agreements and open market purchases. It also retired an additional 1.5 million shares received for no additional consideration in Q1 2023 upon final settlement of an ASR agreement executed in Q4 2022.
The total remaining authorization for future common stock repurchases under LMT's share repurchase program was $7B as of the end of Q3.
Subsequent to the end of Q3, LMT's Board authorized a $6B increase to the share repurchase program. The total authorization of the current program for future purchases is currently $13B.
Valuation
In FY2013 - FY2022, LMT's diluted PE levels were 16.02, 19.47, 19.27, 18.81, 26.04, 24.80, 18.51, 15.16, 16.38, and 22.37.
These are LMT's forward-adjusted diluted PE levels at the time of my September 6 post. I used the forward-adjusted diluted earnings estimates from the brokers which cover LMT and my ~$430 purchase price:
- FY2023 - 22 brokers - mean of $27.14 and low/high of $26.76 - $27.46. Using the current mean, the forward adjusted diluted PE is ~15.84.
- FY2024 - 23 brokers - mean of $28.10 and low/high of $27.16 - $28.75. Using the current mean, the forward adjusted diluted PE is~15.3.
- FY2025 - 18 brokers - mean of $29.05 and low/high of $26.74 - $31.25. Using the current mean, the forward adjusted diluted PE is ~14.8.
Although LMT's FY2023 adjusted diluted EPS forecast was (and still is) $27.00 - $27.20, I looked at LMT's valuation if it were to only generate adjusted diluted EPS of $26.50 in FY2023. Using this estimate, I determined the forward adjusted diluted PE would be ~16.23.
LMT's share price as I compose this post following the October 18 market close is ~$446. Its valuation using this share price and the currently available forward-adjusted diluted earnings estimates from the brokers which cover LMT is:
- FY2023 - 22 brokers - mean of $27.24 and low/high of $27.00 - $28.00. Using the current mean, the forward adjusted diluted PE is ~16.4.
- FY2024 - 22 brokers - mean of $27.23 and low/high of $25.26 - $28.96. Using the current mean, the forward adjusted diluted PE is ~16.4.
- FY2025 - 19 brokers - mean of $28.74 and low/high of $24.97 - $31.19. Using the current mean, the forward adjusted diluted PE is ~15.5.
Despite the recent uptick in LMT's share price, I consider LMT to be somewhat undervalued.
Final Thoughts
LMT was my 9th largest holding when I completed my Mid-2023 Investment Holdings Review; I am reasonably confident it is still a top 10 holding.
On September 6, LMT issued an update regarding its F-35 Technology Refresh 3 (“TR-3”) schedule projections. In my brief September 7 post, I disclosed my decision to acquire an additional 50 shares @ ~$424 thus bringing my LMT exposure to 559 shares; these shares are held in one of the 'Core' accounts within the FFJ Portfolio.
Dividend metrics are of little relevance to me; I focus on an investment's total potential long-term return. Based on my circumstances, I would rather a company prioritize share repurchases over dividend distributions. This way, I incur no taxable income and if I hold shares indefinitely, I can defer any capital gains tax well into the future (this assumes a much higher share price down the road because the company has been creating shareholder value). Naturally, share repurchases must be made when shares are attractively valued.
LMT is unlikely to become a '10-bagger' (an investment that appreciates or has the potential to increase tenfold). I choose to invest in it, however, because it consistently generates strong FCF and earnings. Although LMT's share price has been rangebound since early 2022, this is a relatively short timeframe considering that my investment time horizon is decades. In my opinion, LMT is likely to be a far more valuable company in another 1 - 2 decades.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long LMT.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
