LMT - Lockheed Martin: Huge Growth Ahead

2023-08-18 19:51:11 ET

Summary

• Lockheed Martin has a diverse portfolio with well-balanced revenue streams, making it more flexible and lucrative compared to competitors.
• Escalating geopolitical tensions worldwide, along with increased defense budgets, are favorable conditions for Lockheed Martin's growth.
• LMT stock is undervalued and currently being traded at an affordable price, making it a great buy opportunity for long-term investment.

Thesis

The Lockheed Martin Corporation ( LMT ) Stock Price Today, Quote & News) is a defense, arms, aerospace, information security and technology company based in Maryland, in the Washington DC area. The LMT stock has not had a great year, with its share price decreasing -5.45%. However, with the easing of the pandemic, the company stabilized its fundamentals, experiencing consistent revenue growth and expanding its business to global markets. Furthermore, the stock is currently being traded at a very affordable price. I strongly believe that these factors combined with favorable geopolitical conditions ahead make LMT stock a great buy.

Unmatched Diversity in Portfolio

Lockheed Martin sets itself apart from its competitors through diverse revenue streams. The company has four main business segments as denoted in the figure below.

As illustrated in the graph above, the company has relatively well-balanced revenue streams, which I believe allows the company to be far more flexible and lucrative in its technological developments and innovations compared to its foremost competitors, including Raytheon Technologies and Boeing. With its main aeronautics offerings such as F-16 Fighting Falcon and C-130 Hercules, Lockheed Martin provides a diverse range of other products and services that goes from surface-level to space. In the modern political era where the consumers' (or the defense/security-related entities) demands and needs are very sensitive to change, Lockheed Martin’s business model is well-suited to thrive and outperform its competitors.

Escalating Geopolitical Tensions

The heightened geopolitical tensions between nation-states is inevitable now. Worldwide conflicts like the Russian invasion of Ukraine, increased risk of health-related crises such as Covid-19, along with continued unstable political conditions in the Middle East are more than enough to speak to the escalated geopolitical tensions in the current political atmosphere. I view this as the most favorable condition that Lockheed Martin could possibly operate under. Governments worldwide are increasing their budget for defense and security under this heightened geopolitical tensions worldwide. The US government is not an exception. As the largest contractor to the US government, Lockheed Martin is bound to be the biggest beneficiary of the increased defense budget. Given that the company already reached approximately 8% of YoY net sales growth in 2Q23, I believe escalating geopolitical tensions along with easing macroeconomic conditions would allow Lockheed Martin to soon achieve double-digit growth in net sales by the end of the year.

Financials

Financially, Lockheed Martin has achieved baseline growth. In 2Q23, the company’s net sales grew 8% YoY, while its earnings per share only increasing $0.02 from last quarter. According to analysts, Lockheed Martin's revenue growth does not seem very optimistic, as it is forecasted to have 2.49% per year growth, which is slower than the US Aerospace & Defense industry average ( 5.13% ).

However, I believe the company is just at the starting point of witnessing significant growth. In the short term, the numbers might stay the same and profit margin growth could be minimal. However, R&D has steadily been increasing and LMT is expanding its business in global markets with international customers representing 26% of its total sales. The company’s financial foundations are strong, and it is continuously finding its way to reduce costs by adopting technological initiatives. As the company further settles into the global markets and signs more government contracts with expanding security/defense needs, I am confident that the company will see double digit net sales growth along with more-than-average yearly revenue growth in the long-term close to 7-8%. The company is bound to eventually benefit from its position as the largest contractor to the US government. Ongoing geopolitical tensions along with the US government's increased defense budget will certainly bring up Lockheed Martin’s numbers in the near future.

Valuation

LMT stock is undervalued. According to the consensus , the stock is currently being traded at a relatively cheaper price of $464.31 with its average price being $508.79. The price-to-earnings ratio also suggests that the LMT stock is undervalued compared to its competitors in the defense industry. Lockheed Martin’s P/E ratio is currently 16.32, while the sector median is 19.63.

I conducted EV/EBITDA valuation of the LMT stock, deriving the industry average multiple from the five most notable competitors of Lockheed Martin. I excluded Boeing because the ratio was too big for comparison (an outlier). Setting the average multiple as 12.81, I concluded that LMT’s fair equity value per share is $453, which is slightly higher than the current share price. All in all, I believe LMT stock has plenty of room for growth and it is currently being traded at a very reasonable price, making it a great buy opportunity for long-term investment.

Risk

Having a government contract as its primary revenue driver is a mixed blessing for Lockheed Martin. Currently, 73% of the company’s sales are derived from U.S. government contracts, which means that the company is highly dependent on government’s initiatives, policy changes, and more broader geopolitical conditions. As much as I view current geopolitical tensions would be favorable for the company, the company’s performance, sales, and revenue is very sensitive to political changes, which casts a big challenge to the company. I firmly believe that the company's continuous stride in technological innovation with its irreplaceable products with great quality will allow Lockheed Martin to remain strong and resilient in the market, despite uncertainties.

Conclusion

Lockheed Martin’s diverse product portfolio, technological strength, and strong relationship with the US government, along with increasing geopolitical tensions worldwide, gives more than enough reason to invest in its stocks. LMT is a buy.

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