Monday, September 12, 2011

Lockheed Martin Can Defend Your Net Worth

Lockheed Martin (NYSE: LMT) has rapidly risen to the be one of the top dogs in the terrorism industrial complex (TIC) -- the industry of helping government stop terrorism. But can buying its stock protect your portfolio?

It's hard to figure how big the TIC is, but one source estimates that by 2014 the Department of Homeland Security (DHS) will spend $85 billion -- mostly on information technology -- to protect against terrorism.

As I wrote, one of TIC's biggest players is Lockheed whose stock is up 87% in the last decade. It has scaled the ranks of DHS contract winners in the last few years. In 2005 it ranked 13th on a list of the Top 20 DHS contractors. By 2009, Lockheed had climbed to second place on that list, thanks to its big IT support presence at DHS headquarters.

But is that enough of a reason to add Lockheed to your portfolio? Here are four reasons to consider doing so:
  • Low valuation. Lockheed's price-to-earnings-to-growth ratio of 0.59 (where a PEG of 1.0 is considered fairly priced) means its stock price is cheap. It currently has a P/E of 9.4, and its earnings per share are expected to grow 15.8% to $8.72 in 2012.
  • Decent earnings reports. Lockheed has been able beat analyst’s expectations fairly consistently and has done so in four of its past five earnings reports.
  • Increasing sales and profits -- and decent balance sheet. Lockheed has been increasing sales and profits. Its revenue has increased at a 3.7% annual rate from $39.6 billion (2006) to $45.8 billion (2010) while its net income has increased at a 1.9% rate from $2.5 billion (2006) to $2.7 billion (2010) — yielding a slim 6% net profit margin. Its cash has grown faster than its debt. Specifically, its cash rose at a 5% annual rate from $2.3 billion (2006) to $2.8 billion (2010) while its long term debt increased at a 3.3% annual rate from $4.4 billion (2006) to $5 billion (2010).
  • Out-earning its cost of capital. Lockheed is earning more than its cost of capital – but it’s making limited progress. How so? It’s producing no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Lockheed's EVA momentum was 0%, based on first six months’ annualized 2010 revenue of $43.2 billion, and EVA that rose from first six months’ 2010 annualized $546 million to first six months’ 2011 annualized $665 million, using an 8% weighted average cost of capital.
This company looks like a winner to me -- thanks to its low valuation and strong financial performance. But with the broader market plunging, it may pay to wait to pick this one up at an even lower price. 


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