Pick Either Lockheed Martin Stock Or Its Industry Peer – Both Are Likely To Offer Similar Returns

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LMT: Lockheed Martin logo
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Lockheed Martin

We think that Lockheed Martin stock (NYSE: LMT) and Raytheon Technologies stock (NYSE: RTX) in the aerospace & defense industry will likely give similar returns over the next three years. Raytheon is trading at a marginally higher valuation of 2.2x trailing revenues, compared to 2.0x for Lockheed Martin. Looking at stock returns, Lockheed Martin, with 36% returns this year, has fared much better than Raytheon stock, up 17%, and both of them have outperformed the broader S&P500 index, down 17%. There is more to the comparison, and in the sections below, we discuss the possible returns from these stocks in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Lockheed Martin vs. RaytheonWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Raytheon’s Revenue Growth Is Better 

  • Raytheon’s revenue growth of 3.5% over the last twelve months is better than -2.4% for Lockheed Martin.
  • Even if we look at a longer time frame, Raytheon has fared better, with its sales rising at an average growth rate of 23.1% to $64.4 billion in 2021, vs. $34.7 billion in 2018. In comparison, Lockheed Martin’s sales rose at an average rate of 7.7% to $67.0 billion in 2021, compared to $53.8 billion in 2018.
  • Lockheed Martin’s sales over the recent quarters were impacted by lower production volume for Black Hawk and lower sales for its training and logistics solutions programs.
  • The company’s F-35 deliveries were also impacted in Q3 due to an issue over a Chinese metal component, which was later resolved. Lockheed Martin expects its F-35 deliveries to be between 147 and 153 jets by 2024 and increase to 156 in 2025 and beyond.
  • Raytheon has undergone significant restructuring over recent years. United Technologies merged with Raytheon to form Raytheon Technologies in 2020. Furthermore, it spun off its OTIS and Carrier businesses, making Raytheon purely an aerospace and defense-focused company.
  • Raytheon’s commercial airplane business was hit during the pandemic weighing on its commercial OEM and aftermarket sales.
  • The ongoing Ukraine-Russia conflict has increased focus on the defense sector stocks. New business awards will likely drive the performance of defense stocks in the near term, with possible increased defense spending, especially by NATO members.
  • Our Lockheed Martin Revenue Comparison and Raytheon Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Lockheed Martin’s revenue is expected to grow faster than Raytheon’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 5.7% for Lockheed Martin, compared to a 1.6% CAGR for Raytheon, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

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2. Lockheed Martin Is More Profitable

  • Lockheed Martin’s current operating margin of 12.5% is slightly better than 11.7% for Raytheon.
  • This compares with 14.4% and 16.2% figures seen in 2019, before the pandemic, respectively.
  • Lockheed Martin’s free cash flow margin of 15.7% is much better than 8.6% for Raytheon.
  • Our Lockheed Martin Operating Income Comparison and Raytheon Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Lockheed Martin fares better. Its 9.0% debt as a percentage of equity is much lower than 23.0% for Raytheon, while its 4.7% cash as a percentage of assets is higher than 3.4% for the latter, implying that Lockheed Martin has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Lockheed Martin is more profitable and comes with lower financial risk, given its better debt and cash position. On the other hand, Raytheon has seen better revenue growth.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both stocks are likely to offer similar returns.
  • The table below summarizes our revenue and return expectations for Lockheed Martin and Raytheon over the next three years and points to an expected return of 10% for Lockheed Martin over this period vs. a 9% expected return for Raytheon, implying that investors could choose either of the two, based on Trefis Machine Learning analysis –Lockheed Martin vs. Raytheon – which also provides more details on how we arrive at these numbers.

While LMT and RTX stocks are likely to give similar returns, it is helpful to see how Lockheed Martin’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised by how counter-intuitive the stock valuation is for Marine Products vs. Amerco.

Despite higher inflation and the Fed raising interest rates, Lockheed Martin has risen 36% this year. But can it drop from here? See how low can Lockheed Martin stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Dec 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
LMT Return 0% 36% 94%
RTX Return 0% 17% 64%
S&P 500 Return -3% -17% 76%
Trefis Multi-Strategy Portfolio -4% -21% 214%

[1] Month-to-date and year-to-date as of 12/7/2022
[2] Cumulative total returns since the end of 2016

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