Lockheed Martin - consistent profitability in the US defense sector

Ticker: LMT

Author: Stock Analyst  Date: 2021/06/02

Lockheed Martin is a defense company specializing in aircraft, weapons, aerospace, shipbuilding, postal automation and airport logistics.

The target price for the end of 2021 is $ 450.3 per share, which implies upside potential of 17.1% from the current price level. The recommendation is "Buy".

From the US defense budget for 2021, $ 11.4 billion is planned to be spent on the purchase of 79 F-35 fighters manufactured by Lockheed Martin, $ 1.1 billion on the Aegis missile defense system and $ 916 million on the supply of THAAD missile defense systems.

Lockheed Martin's financial performance has been showing steady growth over the years. The company's net profit in the first quarter of 2021 increased by 6% y / y, to $ 1.8 billion, revenue grew by 4% y / y, to $ 16.6 billion.

The company has improved its forecast for financial performance for 2021. Thus, revenue is expected in the range of $ 67.3-68.7 billion, and net profit - in the range of $ 26.4-26.7 per share.

Issuer Description

Lockheed Martin is a defense company specializing in aircraft, weapons, aerospace, shipbuilding, postal automation and airport logistics. In 2020, the company received 74% of its revenues from orders from the US government, including 64% from the US Department of Defense.

Aeronautics. Key products of Lockheed Martin are combat aircraft, in particular the fifth generation F-35 fighters, transport aircraft - C-130, as well as low-cost fighters - F-16 and F-22 Raptor. At the end of 2020, the segment brought the company 39% of the total revenue.

Rotary and Mission Systems. The company designs, manufactures and services Seahawk, VH-92A and Combat Rescue Helicopter military and commercial helicopters, as well as the Aegis missile defense system. In addition, the group's divisions provide cybersecurity, communications and command and control services to clients with defense applications solutions. The segment generated 26% of total revenue.

Missiles and Fire Control. Lockheed Martin is one of the leading developers of air and missile defense systems for the US military and other countries. Defense systems Patriot Advanced Capability-3 and Terminal High Altitude Area Defense (THAAD) are in service with the United States, Qatar, Japan, Romania, Poland, the United Arab Emirates, Sweden, Korea, Bahrain and Germany. Also in this segment, Lockheed Martin produces fire control systems, tactical surface-to-air missiles. This direction brought the company 17% of the total revenue.

Space (Space). The development of military space systems plays an important role in the military industry. Lockheed Martin designs and manufactures satellites, global positioning systems - GPS 3, space infrared system programs - SBIRS, and Trident II D5 ballistic missiles. The segment generated 18% of total revenue.

Attractiveness factors

The US government is the main customer of the company's products with a 74% share. Lockheed Martin continues to win the majority of tenders for the supply of military fighters, helicopters and missiles to the US Department of Defense. Despite the difficulties caused by the coronavirus pandemic, Lockheed Martin sold 120 F-35 fighters in 2020, up from 134 fighters in 2019. The company's business proved to be resistant to the crisis due to the stable growth of the order portfolio.

The U.S. Senate for the Armed Services adopted a $ 740.5 billion defense budget for fiscal 2021, of which $ 11.4 billion is slated for the acquisition of 79 Lockheed Martin F-35 fighters, as well as $ 1.1 billion for the Aegis missile defense system and $ 916 million for the supply of THAAD anti-missile defense systems.

In addition, the company entered into a contract with the United States Air Force to supply F-16 fighter jets to foreign military partners for up to $ 62 billion over 10 years, with an initial supply estimated at $ 4.9 billion for 90 F-16 fighters for two international customers. At the same time, the US Department of Defense received from five foreign military partners about $ 14 billion in aggregate to build 128 F-16 fighters by 2026.

Lockheed Martin has signed a 10-year, $ 15 billion contract with the United States Air Force to develop, modify and manufacture variations of the C-130J Super Hercules transport aircraft. Note that the contract includes the supply of military equipment to foreign countries and was concluded on a non-competitive basis.

The company has entered into a $ 1.12 billion contract with the U.S. Army to produce over 9,000 GMLRS unitary missiles, AW missiles, over 2,000 low-cost short-range RRPR training missiles, and comprehensive logistics support for the army. The last batch is shipped until September 2023. In addition, Lockheed Martin received a $ 428.4 million contract from the US Air Force to deliver 400 JASSM-ER air-to-surface cruise missiles by July 2025.
The US Army and Lockheed Martin signed an agreement to supply PAC-3 MSE missiles, launcher upgrade kits, and essential equipment and services. The equipment is intended for both the US military and foreign customers. These weapons will be delivered in 2021-2023, and the total value of the contract is $ 6.07 billion. Note that ten countries have signed contracts for the purchase of PAC-3 MSE missiles for the Patriot system, including the United States, Qatar, Japan, Romania, Poland, United Arab Emirates, Sweden, Korea, Bahrain and Germany.

Lockheed Martin received a $ 187.5 million contract from the Pentagon to create a constellation of defense satellites in low-earth orbit. Work on the production of satellites will take place both in the United States and at companies in Germany, Canada and Spain. Ten new-generation satellites are expected to be launched into space in 2022.

In addition, Lockheed Martin's space division won a $ 4.9 billion contract from the US Department of Defense to produce three satellites for the US Space Force. The satellites will be used to track the launches of ballistic missiles and space rockets as part of the Next-Generation Overhead Persistent InfraRed (NG-OPIR) program. NG-OPIR satellites are slated to replace the current US SBIRS system. The company received the first contract for the development of three satellites of this constellation back in 2018. The new contract provides for the production, assembly, testing and delivery of spacecraft. The first of these satellites is expected to be launched in 2025. In total, the NG-OPIR system will include five satellites. Three Lockheed Martin satellites will be placed in geostationary orbit, and two more Northrop Grumman satellites will be launched into polar orbit.

Financial performance

  • Lockheed Martin's financial performance has been showing steady growth over the years. The company's net profit in the first quarter of this year increased by 7% to $ 1.8 billion, or $ 6.56 per share, compared to $ 1.7 billion, or $ 6.08 per share, for the same period last year. Quarterly revenue grew by 4%, from $ 15.7 billion a year earlier to $ 16.6 billion. Note that analysts expected earnings of $ 6.30 per share on revenue of $ 16.3 billion.
  • The company improved its earnings forecast for the current year to $ 26.4-26.7 per share and raised its forecast for annual revenue to $ 67.3-68.7 billion. The January forecast assumed earnings per share in the amount of $ 26-26.3 and revenue by the level of $ 67.1-68.5 billion.
  • Revenue for the Aeronautics division in the reporting period rose slightly from the same period a year earlier to $ 6.39 billion, thanks to increased sales of F-16 fighters, which was partially offset by lower sales of fifth-generation F-35 and F-22 Raptor fighters. The segment's EBIT increased by 3% YoY to $ 693 mn, while the EBIT margin increased by 0.3 pp to 10.9%.
  • Missiles and Fire Control revenue increased 5% YoY to $ 2.75 billion driven by increased sales of PAC-3 air and missile defense systems, ATACMS operational-tactical missile system, precision cruise missiles air-to-surface class JASSM and long-range anti-ship missiles LRASM. At the same time, sales of LANTIRN navigation and sighting systems and SNIPER suspended sighting stations were reduced in this segment. The division's EBIT remained unchanged from a year earlier at $ 396 mn, while EBIT margin declined 0.7 pp to 14.4%.
  • Revenue in the Rotary and Mission Systems segment rose 10% YoY to $ 4.11 billion, driven by strong growth in sales of logistics management programs and international pilot training, as well as Sikorsky helicopters. The division's EBIT increased by 15.2% YoY to $ 433 mn, while the EBIT margin increased by 0.5 pp to 10.5%.
  • The company's space division (Space) recorded a 3% y / y increase in revenue to $ 3.02 billion, which was associated with increased sales under programs for the Atomic Weapons Establishment (AWE) research center of the United Kingdom's Department of Defense, which is responsible for the development of nuclear weapons. The segment's EBIT declined 19.2% YoY to $ 227 million, while the EBIT margin fell 2.1 pp to 7.5%.

Dividends

Lockheed Martin is a stable dividend payer and has been increasing its dividend payments for 18 years. At the end of 2020, the company allocated $ 2.8 billion, or $ 9.8 per share, to payouts, with a yield of 2.61%. At the same time, we note that in the fourth quarter of 2020, management increased the amount of quarterly dividends by 8%, to $ 2.6 per share. In the first quarter of this year, the company paid out $ 739 million in dividends, or $ 2.6 per share, with a yield of 0.71%.

Valuation

We have benchmarked Lockheed Martin based on 2021 financial projections. Our valuation is defined as the arithmetic mean of estimates based on P / E 2021E and EV / EBITDA 2021E multiples.

Our estimate of the fair value for Lockheed Martin at the end of 2021 is $125 billion, or $450.30 per share, which implies 17.1% upside potential from the current price level. The recommendation is "Buy".

The weighted average target price for a sample of analysts with a historical performance of forecasts for this stock of at least average is, according to our calculations, $ 421.9 (upside - 9.72%), the stock rating is 3.25 (rating value 5.0 corresponds to the Strong Buy recommendation , and 1.0 is Strong Sell).

Stock market performance

During the last 12 months. LMT shares are outperforming the broad market index and Vanguard Industrials ETFs. The S&P 500 is up 34.2% since May 27, 2020, and LMT shares are trading near last year's levels. Industrial ETFs (Vanguard Industrials) gained 46.6% over the period.