Lockheed Martin Stock Looks Undervalued

Recently, concerns regarding full production of F-35s took a toll on the shares of Lockheed Martin (NYSE: LMT) despite multiple contracts awarded by the U.S. military and the recent bid to acquire Aerojet Rocketdyne. Lockheed Martin’s revenues are likely to expand by 9% in 2021 driven by a growing defense budget and heightened demand for space exploration. With the new administration in office, LMT’s F-35 program is expected to observe a headwind during the first quarter. However, the program contributes a third of total revenues and a major chunk of the order backlog. Thus, Trefis believes that the recent dip in LMT’s share price looks unwarranted. Moreover, dividend payouts are backed by strong fundamentals, a huge order backlog, and stable margins. We highlight the key factors driving Lockheed Martin’s Valuation in an interactive dashboard analysis.

Aeronautics and Missiles & Fire Control segments have been key performers

For 2020, Lockheed Martin is likely to report $63 billion of total revenues primarily supported by its Aeronautics and Missiles divisions. Aeronautics division is engaged in the design and development of F-35 Lightning, C-130 Hercules, F-16 Falcon, and F-22 Raptor. The Missiles & Fire Control division is responsible for the popular PAC-3 missile. The advanced rocket propulsion technology of Aerojet Rocketdyne’s will further enhance the company’s missiles and space businesses. Interestingly, the U.S. government agencies including NASA, U.S. Air Force, U.S. Army, MDA, etc., contribute 96% of Aerojet’s total revenues – a key similarity between the two companies. Since 2017, Lockheed Martin’s Aeronautics, Missiles & Fire Control, Rotary & Mission Systems, and Space segments have observed revenue growth of 25%, 51%, 10%, and 22%, respectively.

Dividends supported by stable margins

In the past few years, the company’s net margins have remained fairly stable within the 9-10% range supporting dividends and share repurchases. The quarterly dividend increased from $1.80/share in Q1 2017 to $2.60/share in Q3 2020. Despite production related challenges in 2020, the company is likely to report a 10% net income margin and an 11% growth in earnings per share. Moreover, LMT has returned $1.1 billion to investors through share repurchases in the first nine months of 2020 – indicating strong free cash flow generation even during the crisis. Considering $63 million of total revenues, $24.21 of EPS, and a P/E multiple of 17.2, we have a share price estimate of $417 for LMT – which is 20% above the current market price.

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