Time To Buy Lockheed Martin Stock?

by Trefis Team
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The shares of General Dynamics (NYSE: GD) have almost recovered to pre-Covid levels while the shares of its competitor Lockheed Martin (NYSE: LMT) have been trending downward since January. As three-quarters of General Dynamics and Lockheed Martin’s business comes from the U.S. government, Trefis believes that Lockheed Martin’s stock looks undervalued considering the gains in General Dynamics. Lockheed Martin and General Dynamics are prominent military contractors of the U.S. government associated with design, development, and manufacturing of aircraft, missiles, combat vehicles, advanced weapon systems, and related services. Despite the uncertainty surrounding macroeconomic recovery, both company’s strong order backlog and multi-year government contracts safeguard long-term shareholder returns. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, LMT vs. GD: Is LMT Stock Appropriately Valued Compared to GD?

1. Revenue Growth

Lockheed Martin’s growth has been stronger than General Dynamics’ over the last three years, with LMT’s revenue expanding at an average rate of 10% per year from $50 billion in 2017 to $65.4 billion in 2020, versus GD’s revenue which grew annually by 7.4% from $31 billion in 2017 to $37.9 billion in 2020.

  • General Dynamics’ four operating segments, Aerospace, Marine Systems, Combat Systems, and Technologies contribute 21%, 26%, 20%, and 33% of the total revenues, respectively. The company’s Marine and Combat segments have observed strong growth in recent years largely supported by submarine programs, artillery production, and combat vehicles. The company’s order backlog has remained fairly level at $290 billion in the past few years.
  • Lockheed Martin’s four operating segments, Aviation, Missiles, Rotary Systems, and Space contribute 40%, 17%, 25%, and 18% of the total revenues, respectively. With the acquisition of Aerojet Rocketdyne, LMT’s Space and Missiles & Fire Control divisions are likely to observe top line growth in the coming years. Moreover, LMT’s order backlog increased by $42 billion from $105 billion in 2017 to $147 billion in 2020.

2. Returns (Profits)

Lockheed’s operating profit margin has consistently remained 4-percentage points higher than General Dynamics – leading to a better operating cash flow margin and investor returns (dividends & share repurchases).

  • In 2020, LMT’s Aeronautics, Missiles & Fire Control, Rotary & Mission Systems, and Space segments reported an operating margin of 11%, 14%, 10%, and 10%, respectively. As the F-35 program contributes nearly 27% of LMT’s total revenues, the Aeronautics segment has been key to earnings expansion.
  • General Dynamic’s Aerospace, Marine Systems, Combat Systems, and Technologies segments reported an operating margin of 13%, 9%, 14%, and 10%, respectively. Consistent with the trend, the company’s Marine and Combat segments are likely to support earnings growth in 2021.
  • Interestingly, Lockheed Martin and General Dynamics’ top line is likely to expand in 2021 despite concerns of a slow macroeconomic recovery and government finances marred with pandemic aid packages.

3. Risk

Per Q4 2020 filings, Lockheed Martin and General Dynamics reported $12 billion and $10 billion of long-term debt, respectively. Given, $50 billion worth of total assets on GD and LMT’s balance sheet, General Dynamics’ lower asset returns make it a riskier bet over Lockheed Martin.

  • Continued revenue growth has led to consistent cash generation, dividend payouts, and share repurchases by Lockheed Martin and General Dynamics.
  • Since 2018, LMT and GD’s dividend per share has increased by 20% and 18%, respectively.
  • As the U.S. government contributes around 70% of LMT and GD’s top line, both stocks offer a low downside risk even during times of crisis.
  • Despite LMT’s lower risk and superior revenue growth, the stock remains 20% below pre-Covid levels – indicating substantial room for growth in LMT stock.

While Lockheed Martin’s stock looks undervalued, the coronavirus pandemic has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for General Dynamics vs. Anthem shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

See all Trefis Price Estimates and Download Trefis Data here

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