We think that Lockheed Martin’s stock (NYSE: LMT) currently is a better pick compared to Oracle’s stock (NYSE: ORCL). LMT stock trades at about 1.5x trailing Revenues, compared to around 4.6x for ORCL stock. Does this gap in LMT’s valuation make sense? While Oracle’s Hardware and consulting business has been affected in recent years, Lockheed Martin’s business has capitalized on the uptick in Pentagon spending. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical Revenue Growth as well as Operating Income and Operating Margin growth. Our dashboard Oracle vs. Lockheed Martin: ORCL stock looks overvalued compared to LMT stock has more details on this. Parts of the analysis are summarized below.
1. Revenue Growth
Between FY 2017 and FY 2020 (fiscal ends in May), Oracle’s Revenues grew by about 3.4%, from around $37.8 billion to $39.1 billion. The slow growth can largely be attributed to negative growth in Hardware and consulting segment. On the other hand, Lockheed Martin’s Revenue grew from $47.3 billion in 2016 to $59.8 billion in 2019. For the last twelve month period, Lockheed Martin’s Revenues have grown to $64.2 billion.
2. Operating Income
Oracle’s operating income grew from $13.5 billion in FY 2017 to $14.1 billion in FY 2020, reflecting a 4% growth, and operating margins grew from 35.7% to 36% over the same period. Looking at Lockheed Martin, the operating income grew from $5.9 billion in 2016 to $8.5 billion in 2019. Lockheed Martin’s operating margins rose from 12.5% to 14.3% between 2016 and 2019.
The Net of It All
Lockheed Martin’s revenue and operating income growth is much better than Oracle’s over the last few years. Oracle’s revenue growth has slowed down over the years as the Hardware segment and consulting segment has taken a hit. On the other hand, Lockheed Martin’s revenue has grown exponentially during the last few years helped by an increase in the Pentagon spending. Also, Lockheed Martin operating margins have trended better compared to Oracle. As such, we think the difference in P/S multiple of 1.5x for Lockheed Martin versus 4.6x for Oracle will likely narrow going forward, implying better returns for Lockheed Martin’s stock.
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