What You Need To Know About Lockheed Martin Stock
Lockheed Martin Corporation (LMT) are a defence and aerospace company based out of Bethesda, Maryland. They are a technology powerhouse who in basic terms produce fighter jets, rockets, and rotary systems. Lockheed relies almost exclusively on government contracts. The USA makes up 73% of revenue. The remainder is made up from 49 international allies.
Footnote Finance is bullish on Lockheed. Here are three reasons why.
The Bull Case For Lockheed Martin Stock
Lockheed Martin Cutting Edge Technology
If you take anything away from this article, let it be the fact that Lockheed Martin produce the finest fighter jets in the world. The F22-Raptor and the F-35-Lightening are unquestionably two of the greatest military aircrafts ever produced. Their stealth capabilities are unparalleled. Speed is unmatched. Maneuverabilityunbeatable. If you are going to war, you want these jets in your corner.
Why is this important? Well, because dominance translates into financial results. In 2022, 40% of Lockheed’s revenue was generated by the sale of aeronautics. A cool $27 billion. To put that into perspective, McDonalds (MCD), generated total global revenue of $22 in 2022.
A silly comparison? Perhaps. But it shows just how indispensable Lockheed’s aircrafts are to the countries they supply. And that’s just one part of the picture. Whether it’s missiles or rotary systems, their tech is some of the best in the world. This is why LMT’s success will continue into 2023 and beyond.
And that’s especially true as we enter a world where international relations are becoming evermore strained.
Geopolitical Tensions
Two major geopolitical pressure points exist in 2023.
First, the War in Ukraine. Since the conflict began, President Zelensky has been steadfast in his search for Lockheed’s top technology. This is not only a testament to the company’s products, but also a sign of growing demand on a global stage. Zlenesky’s requests have been answered. Just last month, it was agreed than between 40-60 F-16 fighter jets will be coming to Ukraine via its allies, over the next eighteen months.
But there’s more to this story than a just a few aircrafts sold and donated. The War in Ukraine is the first major conflict of its kind brought to Europe (or the West) since the Second World War. Tensions between NATO and Russia have reached a boiling point. The alliance is bulking up its arsenal. And who will they turn to? Lockheed Martin.
The second pressure point lies between China and the USA. This may never to an actual war, but preparations are still being made just in case. In 2022, the US allocated $877 billion on military spending: $48 billion of which was spent at Lockheed Martin. As relations continue to strain over ideology, economics, and most importantly Taiwan, I can only see this figure rising.
Naturally, this is good news for Lockheed Martin. The company have the infrastructure to meet growing global demand and they’ll make plenty of profit on the way. This will have an impact on the share price, which only one place to go if tensions persist. Up.
Financials and Valuation
Lockheed Martin’s financials are impressive and consistent. In general, their revenue grows each year at a steady rate, as does their profit margins. Unsurprisingly, 2023 is shaping up to be another great year.
In terms of valuation, there’s plenty of evidence that would suggest LMT are currently trading at a discount. Their P/E is 16x, compared to an industry average of 25x, and a fair estimate of 20x. A Discounted Free Cash Flow valuation shows significant upside potential, placing the company’s share price at a 19% discount.
Risks
At first glance of Lockheed’s financials, debt is my primary concern. A debt-to-equity ratio of 189% is far, far higher than I would like to see for any potential investment. But it’s not that simple for LMT. The company generate so much revenue their debts are exceptionally well covered. Case and point: in June 2018, debt/equity was more than 2,000%.
Another risk is the counter to one of the company’s strengths: geopolitical tensions. What happens if China-US relations improve? What happens if, or more to the point when, the War in Ukraine ends? For the world, these events will of course be welcomed. But not by LMT.
Conclusion
Many analysts are dubious on Lockheed Martin’s potential for growth. But we at Footnote Finance disagree. At geopolitics enters choppier waters, we feel the stock is going to continue to thrive in the coming years. Naysayers seem not to account for LMT’s advantage as one of if not the top producer of fighter jets in the world, a keystone for conflict preparation.
There are few risks to speak of, except that of waning defence spending. That’s something we can live. Especially after looking at the company’s reliable financials.
It would be an exaggeration to say that LMT stock is trading at a major discount, but they are slightly undervalued. We think this is especially important given the bull cases.
That’s why Footnote Finance rates buy.
Thanks for reading.
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