Lockheed Martin Stock is Flying Too High

After falling to a low of $276 in March, Lockheed Martin’s stock (NYSE: LMT) has seen a strong rally over recent months to scale over $410 last week. With a price correction in the last few days leading the stock lower to around $380, we believe that it is fairly valued. While Lockheed is the largest defense contractor of the U.S. government and has a strong order backlog of $144 billion, its stock has low upside potential in the near- to medium-term due to a high trailing P/E multiple of 18 and the likelihood of production breaks in the near-term. Trefis highlights the historical trends in revenues, earnings, and valuation multiple that have shaped future expectations from the company and pumped its stock by 33% since 2017 in an interactive dashboard Why Has Lockheed Martin Stock Gained 33%?

Supported by the multi-year F-35 program, Lockheed Martin’s revenues have increased by 20% from $50 billion in 2017 to $60 billion in 2019. Since the program’s inception a decade ago, the company has manufactured a total of 513 aircraft with 134 deliveries in 2019 alone. The U.S. government has an inventory objective of 2,456 F-35s, which is expected to contribute towards the company’s top-line growth in the coming years. Notably, the high demand for the fifth-generation aircraft in the international market is expected to augment the F-35 program’s revenue contribution from the current level of 27%.

In-line with the expanding revenues, the company’s net income increased from $5 billion in 2018 to $6.2 billion in 2019, supplemented by improving gross margin and lower effective tax rate. On a per-share basis, the growth has been much higher due to regular share buybacks. In fact, the company has returned $11.8 billion to shareholders through dividends and share repurchases since 2017. Moreover, the net margin is likely to benefit from low production costs and long-term debt retirements in the coming years. However, we believe that the stock currently trades at a high P/E ratio, keeping in mind the supply chain disruption risks associated with the pandemic.

What’s the likely trigger to Lockheed Martin’s downside?

If there isn’t clear evidence of containment of the virus over the next couple of months, or if there is a second wave of infections across the globe, the stock could potentially observe a dip. Under such a scenario, the P/E multiple could decline with a revision of revenues and earnings forecast for 2020 and 2021.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of coronavirus impact on a diverse set of Lockheed Martin’s peers, including Boeing and Textron. The complete set of coronavirus impact and timing analyses is available here.

While Lockheed Martin’s stock looks fairly priced as of now, the shares of its peer Boeing has rallied sharply over the last few weeks despite the likelihood of a delay in MAX certification. Are Boeing Investors Overlooking Impact Of Order Deferrals And Ballooning Debt On The Stock?

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