3 Reasons to Buy Lockheed Martin Stock on Weakness
June 21, 2018, 11:10:44 AM EDT By Tom Taulli, InvestorPlace Media
Since April, Lockheed Martin (NYSE: LMT ) stock has been under pressure. Yet the company is not alone. Keep in mind that the defense industry has essentially gone out of favor, as seen with the weakness in operators like Northrop Grumman (NYSE: NOC ), Raytheon Company (NYSE: RTN ) and General Dynamics Corporation (NYSE: GD ).
There are certainly reasons for this. President Trump's summit with North Korean leader Kim Jong Un has resulted in a thawing of relations. One of the notable moves was to cancel joint U.S.-South Korean military exercises. It also looks like Kim is interested in moving toward denuclearization.
But there is another issue that has weighed on LMT stock: the fears of a global trade war. Consider that the company is looking to grow its business by selling its wares in foreign markets. But unfortunately, there are signs that Europe may start to pull back on military expenditures from U.S.-based firms in retaliation to Trump's moves.
Granted, such factors are serious - and difficult to gauge. But I still think there are other key trends that should help overcome these problems, making LMT stock an interesting opportunity.
So let's take a look:
LMT Stock Advantage No. 1 -
The F-35. When looking at the long-term growth of LMT stock, the main driver is the F-35 Joint Strike Fighter.
It's true that the process has been long and arduous. And there will likely be continued issues. But this is to be expected with any complex piece of technology. The F-35 is a fifth-generation fighter that has advanced stealth, network-enabled operations and laser-precision targeting. There are also three versions, which deal with different types of runways and engagements.
Yet the recent Pentagon budget shows that the F-35 will be highly strategic. Consider that there was an appropriation for 20 more jets.
But this just scratches the surface. Some estimates are that the Pentagon will purchase as many as 2,400 of these jets in the coming years.
LMT Stock Advantage No. 2 -
Diverse Platform. While the F-35 will represent a large portion of the business for LMT, this does not mean the revenues will be overconcentrated. The fact is that the company has other major segments.
There is Missiles and Fire Control, which posted a 14% increase in revenues to $7.2 billion last year. This segment includes some of the most important parts of national security like missile defense (such as the Patriot Advanced Capability-3 and Terminal High Altitude Area Defense programs), tactical missiles and air-to-ground precision strike weapon systems.
Next, there are Rotary and Mission Systems, which has been growing particularly strong. In 2017, revenues jumped by 28% to $14.2 billion. This business includes such things as helicopters (like Black Hawks and Seahawks), ships and submarines. There is also a capability for cybersecurity.
Finally, there is the Space program, which logged a 19% increase in sales last year to $9.5 billion. Some of the programs include the Trident II D5 Fleet Ballistic Missile (for submarines) and Orion, which is a spacecraft for NASA.
LMT Stock Advantage No. 3 -
Valuation. LMT is definitely shareholder-friendly. During the latest quarter, the company returned nearly $900 million to stockholders. This included a blend of dividend distributions and buybacks of LMT stock - the current yield is 2.6%.
The valuation is also reasonable, with the forward price-to-earnings multiple at 16.5X. This does look like a good value in terms of the long-term growth prospects and the strong barriers to entry.
And yes, Wall Street agrees. Keep in mind that the average price target $372, which implies potential upside of 22% or so.