A Global Security and Aerospace Giant Pumping Out Over 5%

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future.  As 2013 begins, I would like to focus on a global security and aerospace giant: Lockheed Martin Corporation (NYSE: LMT).

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Strengths:

  • Solid Revenue Growth: In 2007, Lockheed Martin reported revenue of $41.86 billion; in 2012, the company announced revenue of $47.18 billion, representing year over year annual growth of 2.42%.  This growth has been a result of Lockheed Martin gaining market share in its core business segments
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  • Massive Dividend: At the moment, Lockheed pays out quarterly dividends of $1.15, which when annualized puts the dividend as yielding 5.23%, a major strength of the company for long-term investors
  • Institutional Vote of Confidence: 86.46% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Rock Bottom Valuation: Currently, Lockheed Martin carries a price to earnings ratio of 10.52 and a price to sales ratio of 0.60, both of which represent a company trading with a rock-bottom valuation
  • Relatively Low Volatility: The company presently trades with a beta ratio of 0.93, which indicates a company trading with less volatility than the overall market, a major upside for long-term investors
  • Established Nature: Lockheed Martin recently celebrated its 100th year in business, and with this established nature of their business comes an enhanced level of predictability and certainty for investors

Weaknesses:

  • Net Profit Margin Contraction: In 2008, Lockheed Martin possessed a net profit margin of 7.50%; in 2012, the company withheld a net profit margin of 5.80%, and this trend of margin compression is a troubling sign
  • Weakening Net Earnings: Net earnings have fallen from $2.97 billion in 2009 to only $2.65 billion in 2011, representing a 10.77% drop-off, and this earnings decay is a major weakness for the company
  • Projections of Steep Drop-offs In Revenue: According to analyst projections, 2012 is expected to be the peak in revenue at $47.18 billion until the decade starting with 2020, with revenue dipping to only around $42 billion in 2015, and these projections of steep drop-offs in revenue present a major flaw in the business
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  • Net Debt: According to the company’s latest quarterly report, $4.7 billion of cash and cash equivalents sits on their balance sheets; however, this is outweighed by the $22 billion of total debt that the company possesses, and this major net debt is a substantial downside to the overall business as it equates to $52.52 per share
Opportunities:
  • Gaining Share of Total Contracts: Gaining further shares of United States military contracts is a very real opportunity for Lockheed Martin, as since 2008 their share of the aeronautics contract market has increased from 2.60% to 2.78% , and further growth in the share of total US military contracts could significantly help the company
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  • International Order Growth: International orders in the company’s aeronautics and electronic systems segments have grown from $1.65 billion in 2008 to $6.07 billion currently, and from $4.03 billion in 2008 to $4.87 billion currently, and further international order growth could significantly help  the overall company
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  • Dividend Growth: Since implementing their dividend program in 1995, Lockheed Martin has consistently raised their dividend payouts, and further dividend growth is widely anticipated
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  • Acquisitions: The acquisition of innovative technologies assist Lockheed Martin in acquiring new contracts, worth potentially billions of dollars, with the most recent acquisition coming in December 2012 of CDL Systems Limited, and further acquisitions in the future could provide the company substantial opportunities

Threats:

  • Cuts in US Military Spending: The United States is facing a staggering debt totaling over $16 trillion, and cuts in military spending are highly expected, from the $403 billion currently to the projected $327 billion level in 2015, and cuts in US military spending could cripple Lockheed Martin’s growth and result in a decline in projected revenue
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  • Competition: Many major corporations battle fiercely for the contracts of the United States military and international militaries, and the competition to offer the best product for the least amount of money can lead to margin contraction

Competition:

Major publicly traded competitors of Lockheed Martin include The Boeing Company (NYSE: BA), Northrop Grumman Corporation (NYSE: NOC), General Dynamics Corporation (NYSE: GD), and Raytheon Company (NYSE: RTN). All of these companies operate in the aerospace and defense industries and compete directly with Lockheed Martin. Boeing is valued at $57.85 billion, pays out a dividend yielding 2.53%, and carries a price earnings ratio of 14.98. Northrop Grumman is valued at $15.81 billion, pays out a dividend yielding 3.33%, and carries a price earnings ratio of 8.46. General Dynamics is valued at $23.63 billion, pays out a dividend yielding 3.05%, and carries a negative price to earnings ratio. Raytheon is valued at $17.87 billion, pays out a dividend yielding 3.69%, and carries a price earnings ratio of 9.58.

The Foolish Bottom Line:

Financially, Lockheed Martin earns a 5 on a ten point scale. The company possesses solid revenue growth, a rock-bottom valuation, and a business that has survived the occurrences of the last century. However, the company withholds a massive debt load, a single digit net profit margin, and projections that  forecast revenues steeply dropping off into the future. The company’s dividend is massive and growing and will reward investors well into the future, but the upcoming decade will be a very rough one for the aerospace and defense giant. United States military spending will decelerate, and in turn provide Lockheed Martin with less revenue. International growth should compensate for some of the slowdown in the US; but international business only makes up a small portion of overall business. All in all, until United States military spending is once again on the rise, Lockheed Martin is not an investment that will outperform the overall market.


makinmoney2424 has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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