Lockheed Martin Corporation (LMT) released strong FY2020 results and encouraging FY2021 guidance on January 26th. Despite this, the share price has pulled back. It would appear that many retail investors would much rather speculate on high risk companies.
The company's valuation is so attractive I have added to my existing position.
On January 26, 2021, LMT released Q4 and FY2020 results and FY2021 guidance. Results and guidance were favorable but it appears many investors would much rather take highly speculative positions in the hopes of striking it rich. Speculating is not for me and I would much rather invest in companies with a proven track record of profitability and free cash flow, with a bright outlook, and with an attractive valuation.
With LMT's share price having pulled back subsequent to the release of strong earnings and guidance, I have acquired additional shares for one of the 'Core' accounts within the FFJ Portfolio.
In LMT we have a company whose management has options on how to increase shareholder value. In FY2020, LMT generated $24.50 in diluted EPS. Using the current ~$321.75 share price we get a PE of ~13. This compares favorably with 2011 - 2020 PE levels of 10.04, 11.04, 16.02, 19.47, 19.27, 18.81, 26.04, 24.80, 18.51, and 15.16.
FY2021 adjusted diluted EPS guidance provided by LMT ranges from $26 - $26.30. Adjusted diluted EPS guidance from 24 analysts ranges from $25.75 - $26.75 with a mean of $26.32. I wish to be conservative so using $26 and a $321.75 share price we get a forward adjusted PE of ~12.4.
When you have a valuation this low you have to determine if the company is a value trap or whether the company is attractively valued. I don't think LMT is a value trap. The company is growing (see Net Sales growth in ITEM 6. Selected Financial Data found on page 30 of 132 in the FY2020 10-K). This is a company whose Net Sales in FY2016 was $47.29B and $65.4B in FY2020. We also see that LMT is slated to acquire Aerojet Rocketdyne (AJRD) which generated ~$2B in Net Sales in FY2019 and which generated ~$1.5B in Net Sales in the first 9 months of FY2020. We also see from LMT's FY2020 10-K (again on page 30 of 132) that the order backlog of ~$147B is the highest reported in recent years; the backlog for 2011 to 2015 can be found on page 27 of 127 in this document.
What also appeals to me is LMT's track record in reducing share count. In FY2010, the weighted average number of diluted shares outstanding was 368.3 million shares. In FY2020 this had been reduced to 281.2 million.
The AJRD acquisition is expected to close in the second half of 2021 and given the extent to which LMT generates cash I think it is not unreasonable to think that LMT could acquire the company without having to issue additional shares. Looking at page 90 of 132 in LMT's FY2020 10-K we see that LMT has very little debt which matures over the next few years so funding of the AJRD purchase could easily come from cash generated from normal business operations since no cash needs to be directed toward the retirement of debt. In addition, it does not seem reasonable to me that LMT would issue additional shares to fund the acquisition when its share price is depressed. However management decides to finance the acquisition, I am certain LMT shareholders will be aptly rewarded.
From a dividend income perspective, we have LMT paying a $2.60/quarterly dividend. On the basis of $10.40 in annual dividend income and a $321.75 share price, we get a ~3.2% dividend yield. Investors should take into consideration that the next quarterly dividend will be the second at the $2.60 level. Looking at the recent historical dividend increases I do not think it is unreasonable to expect LMT to increase its quarterly dividend to at least $2.75/share (this is conservative!) when LMT declares its quarterly dividend in September. If such transpires then investors will receive 3 dividends at $2.60/share (March, June, September) and one at $2.75/share (December) for a total of $10.55. Using the current share price we get an estimated forward dividend yield of ~3.28%. In my case, shares are held in a taxable account so I incur a 15% withholding tax. As much as I don't like this there is really not much I can do about it.
Based on my estimates, if LMT generates $26 in EPS (not adjusted EPS but actual EPS) and the PE ratio expands ever so slightly to 14 then it is not unreasonable to expect LMT's share price to approach the ~$365 level. On the basis of shares currently trading at $321.75 we're looking at capital appreciation of $43.25 or ~13.4% growth from the current price. Add in the ~3.28% dividend yield and you have a potential ~16.7% return over the next year.
Clearly, nobody knows what can happen in the short-term. I feel much more confident in being able to generate a reasonable return from LMT, however, than from a company which has never generated a profit or which is marginally profitable and has a valuation at a very elevated level.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long LMT.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.