In Doubt, Choose Lockheed Martin


After an incredible Soap Opera (I’m talking about the U.S. Election), Trump won. I’m not here to debate whether it’s a good thing or a bad thing, I’m here to look at the fact: The next morning, Lockheed Martin (LMT) soared over 6%. I’m not part of investors who believe that a President has a huge impact on the stock market. However, this is probably the case for a few single stocks. Since Trump wants patriotism back, what could be better than pushing F-35?

The World (unfortunately) Needs Wars

The threats are not diminishing; they are increasing and so the defensive systems that we can provide are what we hear from countries around the world that they want, Lockheed Chairwoman and CEO Marillyn Hewson said during the company’s third-quarter earnings call lately.

One of the reason LMT is up over 20% this year and more than 240% over 5 years is mainly because the company has been able to show consistent earnings increase:


Source: ycharts.

It is quite an interesting feat considering LMT is operating with a Damocles sword over its head for many years with the budget sequestration. 80% of LMT revenues comes from the U.S. Government. Since the Government is expected to stop spending like crazy in military defense, this is nothing to help Lockheed Martin. However, through ingenuity and strong cost control, they have been able to achieve the undoable with limited revenue growth (until now):


Source: Ycharts.

The recent revenue boost comes from the recent integration of their most impressive acquisition Sikorsky Aircraft helicopter division, making LMT the largest military helicopter manufacturer in the world. If we ignore the recent spike, we can see that revenue growth has been quite an issue for Lockheed Martin over the past 5 years.

Therefore, it is even more important for LMT to have been able to increase their earnings during a difficult period. Now that the dust has settled and management made an important acquisition, everything point toward a strong growth in the upcoming years.

A Protected Monopoly?

One of the reasons why I like LMT so much is that it barely evolves in a monopoly. They have obviously lots of competitors, but LMT has become THE defense company the U.S. government go to when it comes down for airplane firefighters for example. Lockheed Martin has done what BlackBerry did a few years ago by controlling the market. Fortunately for them, it is a lot harder to copy a F35 than a smartphone!

LMT clients are closely bond to them for several reasons. First, the trust between both the client and the company is quite important in this case. We are talking about military defense, you will not change your supplier in a heartbeat! Second, the switching cost for their clients would be incredibly high. Lockheed Martin benefits from several long-term contract guaranteeing a steady income flow. Those contracts are not easily broken. Plus, LMT owns a unique experience in military defense products and services.

It seems LMT is surfing through the perfect storm. As conflicts are rising around the globe, the Congress accepted Lockheed Martin to seek out for international opportunities. This means the company could enlarge its international sales by doing business offshore.

But Mike, LMT is trading at its 5 year high!?!

Many investors will point out that there are no bargain with Lockheed Martin at this price. At the time of writing this article, LMT wasn’t trading at its 52 weeks high… it was trading at its 260 weeks high ????


Source: ycharts

Up until recently, the PE ratio was more than generous for a company that couldn’t post revenue growth. I must admit that at 22 PE ratio, it definitely seems high. However, if an investors would have looked at LMT in 2014 (like I did), he would have seen this graph:


Source: ycharts

Hum…. That’s pretty much the same graph, isn’t? So I’m asking you; does it matter if LMT is trading at its 5 year time high?…. the answer is NOT AT ALL. LMT stock price worth what is worth, period. You may want to wait to get a bargain, but I think it will continue to be a safe bet for any dividend portfolio even at this price. I guess we will have to discuss this investment in 5 years to see who is right…. I rather be on the shareholder side at the time of comparison, what about you?

Leave a Reply