Lockheed Martin Corporation Fundamental Analysis
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Lockheed Martin Corporation
Last Updated: 8 Aug 2023
NYSE: LMT
GICS Sector: Industrials
Sub-Industry: Aerospace & Defence
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Table of Contents
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Management
CEO: Jim Taiclet
Tenure: 3.2 years
Lockheed Martin Corporation's management team has an average tenure of 3.2 years. It is considered experienced.
Source of Revenue
Lockheed Martin Corporation is a global security and aerospace company that engages in the research, design, development, manufacture, integration, and sustainment of advanced technology systems, products, and services. The company also provides a broad range of management, engineering, technical, scientific, logistics, system integration and cybersecurity services. In short, Lockheed Martin’s main areas of focus are defence, space, intelligence, homeland security and information technology, including cybersecurity.
It primarily serves the U.S. government and foreign military sales contracted through the U.S. government.
The company has four reportable segments: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space. It organises the business segments based on the nature of the products and services offered.
Aeronautics
The Aeronautics segment engages in the research, design, development, manufacture, integration, sustainment, support, and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies. Examples of Aeronautics’ major programs include:
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F-35 Lightning II - international multi-role, multi-variant, fifth-generation stealth fighter
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C-130 Hercules - international tactical airlifter
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F-16 Fighting Falcon - combat-proven, international multi-role fighter
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F-22 Raptor - air dominance and multi-role fifth-generation stealth fighter
Missiles and Fire Control
The Missiles and Fire Control segment provides air and missile defence systems; tactical missiles and air-to-ground precision strike weapon systems; logistics; fire control systems; mission operations support, readiness, engineering support and integration services; manned and unmanned ground vehicles; and energy management solutions. Examples of Missiles and Fire Control’s major programs include:
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The Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD) air and missile defence programs
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The Multiple Launch Rocket System (MLRS), Joint Air-to-Surface Standoff Missile (JASSM), and Hellfire tactical and strike missile programs
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The Apache, Sniper Advanced Targeting Pod (SNIPER®) and Infrared Search and Track (IRST21®) fire control systems programs.
Rotary and Mission Systems
The Rotary and Mission Systems segment designs, manufactures, services, and supports various military and commercial helicopters, surface ships, sea and land-based missile defence systems, radar systems, sea and air-based mission and combat systems, command and control mission solutions, cyber solutions, and simulation and training solutions. Some major programs include:
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Sikorsky programs such as those related to the Black Hawk and Seahawk helicopters
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Integrated warfare systems and sensors (IWSS) programs such as Aegis Combat System (Aegis) programs
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Command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance (C6ISR) programs
Space
The Space segment engaged in the research and development, design, engineering and production of satellites, space transportation systems, and strategic, advanced strike, and defensive systems.
Space provides network-enabled situational awareness and integrates complex space and ground global systems to help our customers gather, analyse, and securely distribute critical intelligence data. Examples of major programs include:
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The Space Based Infrared System (SBIRS) and Next Generation Overhead Persistent Infrared (Next Gen OPIR) system programs
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The Trident II D5 Fleet Ballistic Missile (FBM) program
Lockheed Martin Corporation Reportable Segment Revenue FY2022
Lockheed Martin Corporation Economic Moat
Lockheed Martin Corporation Economic Moat
Economic Moat: Wide
There are many ways to identify Lockheed Martin Corporation’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Lockheed Martin Corporation. Please check my summary to understand more about the economic moat.
Performance Checklist
Is Lockheed Martin Corporation’s revenue growing YoY for the past 5 years consistently? Yes.
Is the net income growing YoY for the past 5 years consistently? Inconsistent.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Inconsistent.
Is the EPS growing for the past 5 years? Inconsistent.
Lockheed Martin Corporation Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Yes.
Lockheed Martin Corporation FCF per Share
Management Effectiveness
Is Lockheed Martin Corporation’s ROE consistently at 12%-15% YoY for the past 5 years? Yes.
Whilst Lockheed Martin Corporation's ROE of 68% is outstanding, this metric could be skewed due to their high level of debt.
Is the ROIC consistently at 12%-15% YoY for the past 5 years? Yes.
Lockheed Martin Corporation Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.
Lockheed Martin Corporation Shares Outstanding (Million Shares)
Lockheed Martin Corporation Financial Health
Lockheed Martin Corporation Financial Health (USD Million)
Current Ratio: 1.36 (pass my requirement of >1.0)
Debt-to-EBITDA: 1.68 (pass my requirement of <3.0)
Interest Coverage: 11.22 (pass my requirement of >3.0)
Debt Servicing Ratio: 7.8% (pass my requirement of <30.0%)
Dividend
Current Dividend yield: 2.7%
Have the dividend payments been stable for the past 5 years? Yes.
Have the dividend payments been growing for the past 5 years? Yes.
Lockheed Martin Corporation’s dividend payments are reasonably covered by its earnings and its cash flows.
Lockheed Martin Corporation Intrinsic Valuation
Estimated intrinsic value: $488.54
Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$6300M
Projected growth rate: 7% - 9%
Beta: 0.7
Discount rate: 6.5%
Margin of safety: 25% (Uncertainty: Low)
Price range after the margin of safety: <$367.00
Date of calculation: 8 Aug 2023
Lockheed Martin Corporation Valuation
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
Lockheed Martin Corporation Intrinsic Valuation
Lockheed Martin Corporation Relative Valuation
Lockheed Martin Corporation EV-to-EBITDA vs its peers
Lockheed Martin Corporation Price-Earnings Ratio vs its peers
Lockheed Martin Corporation Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
Lockheed Martin derived almost 71% of the total sales from the U.S. Government in 2021 and is expected to continue to derive most of the sales from work performed under U.S. Government contracts. This indicates a heavy dependence on contracts with the U.S. Government for a sizeable portion of the business. As such, any changes in the U.S. Government’s priorities, delays or reductions in spending may affect Lockheed Martin’s business.
For example, budget uncertainty, the risk of future budget cuts, the potential for U.S. Government shutdowns, the use of continuing resolutions, and the federal debt ceiling can adversely affect the industry and the funding for the programs.
Geopolitical issues and considerations may also have a significant effect on Lockheed Martin’s international business. International sales also may be adversely affected by the actions taken by the U.S. Government in the exercise of foreign policy.
Lockheed Martin is exposed to execution risk due to its contracts, which could be affected by supply chain issues and production challenges, leading to missed deadlines and contractual obligations. This could impact costs and strain Lockheed's customer relationships. Additionally, the use of fixed-price contracts for mature programs puts the financial risk of cost overruns on the company, making it vulnerable to financial harm if development programs are poorly executed.
Summary for Lockheed Martin Corporation
Lockheed Martin Corporation has a wide economic moat due to its intangible assets, high barriers to entry, and high switching costs in the defence industry.
One key intangible asset is the complexity of the products involved in arms production. The technology required for these products demands specialized expertise, often exclusive to specific manufacturers, and has limited commercial use outside the defence sector. Additionally, developing military programs is a lengthy and expensive process, involving significant sunk costs and security clearances for the workforce.
Another intangible asset is the contract structure. Contractors fiercely compete during initial bidding rounds, and once they deliver a working prototype, the government rarely switches suppliers. Early contracts favour the contractor through cost-plus arrangements, which account for cost overruns and complexity. As programs progress, they shift to fixed-price contracts, becoming more profitable over time. Maintenance of delivered systems further adds to revenue, resulting in long-lasting, profitable contracts with decades-long life cycles.
Switching costs for military customers are based on the mission-criticality of the product, extended product cycles, lack of viable alternatives, and the time and risk involved in changing suppliers. Military objectives and lives depend on the proper functioning of these products, providing protection to established suppliers from new competition. Long procurement cycles of products like fighter jets and submarines offer significant long-term revenue and profit visibility, making them less susceptible to competition. Additionally, the time required to replicate mission-fulfilling products discourages switching, as it is more efficient to collaborate with existing contractors for improvements rather than funding new replacement programs.
Let's now examine two segments with particularly strong competitive advantages: Aeronautics and Missiles and Fire Control.
Lockheed's aeronautics segment, primarily driven by the F-35 program, possesses a wide competitive moat for two main reasons. Firstly, its long program life provides visibility into future revenue, with an estimated coverage of about 12 years for the U.S. government's inventory objective alone. Secondly, the complexity involved in developing a stealth multirole fighter jet creates a strong barrier to entry for most companies. The development process of the F-35 took approximately 19 years, and its mission-critical nature further increases the switching cost for the military to switch to another provider. As a result, Lockheed is expected to maintain its dominant position in this industry for the foreseeable future.
The missiles and fire control segment also boasts a wide competitive moat due to its integration with longer-cycle products, the criticality of proper functioning, the high complexity, and the substantial technical know-how required. An improperly functioning missile could lead to casualties among civilians or allied soldiers. Moreover, customers tend to order these products in larger blocks, requiring substantial scale from the contractor. With Lockheed's established expertise, the military is unlikely to find a compelling reason to switch providers.
In conclusion, Lockheed Martin Corporation's economic moat remains strong, thanks to its intangible assets and high barriers to entry and switching costs, ensuring its continued leadership in the defence industry.
Over the past five years, Lockheed Martin Corporation has shown consistent growth in revenue year on year, a testament to its steady performance in the market. However, when it comes to net income and cash flow from operating activities, the picture is a bit more varied, as these indicators have shown inconsistent trends over the same period. On the positive side, the company has managed to maintain positive free cash flow consistently, indicating sound financial management and stability. Nonetheless, the gross margin percentage has been subject to fluctuations, making it less predictable. Despite these ups and downs, one promising aspect is that the free cash flow per share has been on a continuous growth trajectory over the past five years, reflecting the company's ability to generate value for its shareholders.
Lockheed Martin has shown commendable capital allocation strategies over the past five years. Their ROE has consistently ranged from 12% to 15% annually, indicating a strong performance and efficient utilization of shareholder equity. However, it's worth noting that their exceptional ROE of 68% could be influenced by their high level of debt, which may skew the metric. On the other hand, the ROIC has also consistently remained within the 12%-15% range year on year. Additionally, Lockheed Martin's ROIC surpasses its WACC, a positive sign of value creation for investors. An encouraging aspect for potential investors is the declining trendline for the number of shares outstanding, which suggests that the company is managing its capital structure efficiently and potentially rewarding shareholders through share buybacks or other measures.
The company demonstrates a robust and healthy financial profile based on key metrics. With a current ratio of 1.36, Lockheed Martin exhibits a strong ability to cover its short-term obligations, surpassing the desirable threshold of 1.0. The debt-to-EBITDA ratio also indicates that the company's debt level is well-managed. Moreover, Lockheed Martin's interest coverage ratio highlights the company's capacity to meet interest payments comfortably. Furthermore, the debt servicing ratio of 7.8% showcases the company's effective debt management, as it remains well below the acceptable limit of 30.0%, signifying the company's ability to service its debt obligations efficiently.
When considering an investment in Lockheed Martin, several factors should be carefully evaluated. On the positive side, the company boasts a wide economic moat, indicating a strong competitive advantage that can potentially safeguard its market position. Additionally, Lockheed Martin demonstrates good capital allocation practices and maintains a healthy balance sheet, which bodes well for long-term growth and stability. However, it is essential to acknowledge the company's unsatisfactory performance, which may raise concerns among potential investors. Investing in Lockheed Martin comes with a significant level of uncertainty, considering its recent performance and the unpredictable nature of the defence industry. Therefore, a prudent approach would be to exercise caution and seek a margin of safety of at least 25% when considering this investment, allowing for a buffer against potential risks and uncertainties.
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