LMT - Old West - Lockheed Martin Corp.: Checks All The Boxes

Summary

• We bought Lockheed Martin Corp. shares in 2020 for $350 per share, and the stock is trading at $414 today.
• LMT is expected to generate $6.7 billion in free cash flow this year, which gives it a 5.8% free cash flow yield.
• LMT is a complex and far-reaching company that is vitally involved in making the world safer.

The following segment was excerpted from this fund letter .

Lockheed Martin Corp.

Lockheed Martin checks all the boxes in what we look for in a company.

As I sat in the theater watching Top Gun: Maverick, it gave me tremendous pride knowing we are shareholders of Lockheed Martin ( LMT ). When the Top Gun: Maverick team was looking to push the envelope and stand true to Maverick’s need for speed, LMT’s Skunk Works was their first call. With Skunk Works expertise in developing the fastest known aircraft along with a passion for defining the future of aerospace, LMT is at the epicenter of our nation’s defense.

Based in Bethesda, Maryland, LMT is an American aerospace arms, defense, information security and technology company. LMT employs 115,000 people worldwide, including 60,000 engineers and scientists. LMT is the world’s largest defense contractor. They manufacture the F-16, F-22 and F-35 fighter jets, Sikorsky Black Hawk helicopters, Skunk Works technology, Javelin, Himars, and Tomahawk missile systems and much more.

When evaluating a potential investment, we spend a lot of time analyzing financials and doing intense valuation analysis. Something that sets us apart from other money managers is our focus on the people running the company, and especially the CEO. We want to be sure our financial interests are properly aligned with management, and we look for true leadership capabilities and a history of allocating capital in a shareholder friendly manner.

I was surprised Jim Taiclet applied for the LMT CEO job in 2020. Over the years, we were invested in American Tower ( AMT ), the owner of cell towers, and the stock was a tremendous performer. During Taiclet’s 17 years as CEO of AMT, revenue grew from $675 million to $8 billion. Net income grew from a loss of $1.1 billion to a gain of 1.8 billion, and the share price from $10 per share to $260 per share.

LMT had been very ably run by Marilyn Hewson from 2013 to 2020, and Taiclet had been serving as a board member during that time. Taiclet accumulated significant wealth as AMT CEO. I’m assuming it was the challenge of running the world’s largest defense contractor that made him throw his hat in the ring.

Another reason might have been his admiration for LMT as he graduated from the U.S. Air Force Academy and served as an aircraft Commander. He flew multiple missions in a Lockheed C-141 jet during Operation Desert Storm. Taiclet was 60 years old when he became LMT CEO, so it sets up as the perfect way to play out his career. Keeping in mind he has been CEO for only two years, Taiclet owns $21 million of LMT stock. His compensation is heavily stock based where he accumulates an additional $15 million of stock per year as opposed to annual cash compensation of $1.7 million.

We bought LMT shares in 2020 for $350 per share, and the stock is trading at $414 today. Revenue has been growing at 9% per year and net income growing at 12% per year. The stock is selling at 13 times earnings and has a 2.6% dividend yield. The company is expected to generate $6.7 billion in free cash flow this year, which gives it a 5.8% free cash flow yield.

Generating that much free cash flow allowed the company to buy back $4 billion in stock last year, and the dividend has been growing at 12% per year for the past ten years. LMT also has a fortress balance sheet with $9.1 billion of net debt which is only 0.9 times EBITDA.

Another exciting aspect of LMT’s business is their activity in space exploration and tourism. In 2022 their space systems generated over $11 billion in revenue and over $1 billion in profit. LMT’s status as a trusted supplier to the Pentagon and NASA are likely to keep it as a preferred contractor in the future.

LMT is currently the prime contractor on NASA’s Orion spacecraft, which is designed for long-duration human deep space exploration. The Orion craft is also the command-and-control deck for Mars Base Camp. The concept is to transport astronauts from earth, via the moon, to a Mars orbiting science laboratory and confirm the ideal place to land humans on the Martian surface in the 2030’s.

As you can see LMT is a complex and far-reaching company that is vitally involved in making the world safer. The Old West team is confident that under Jim Taiclet’s leadership the company will thrive in the future.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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