Will Lockheed Martin Fly High This Year?
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The business of defense in the United States is a multi-billion-dollar industry. Contractors create the technologies and weapons that keep the country safe, as they create solid profits for many of their investors. While Lockheed Martin (NYSE: LMT) has been the leading defense contractor, is it a high-flying company for investment? Below, I will look at Lockheed Martin and its competitors Boeing (NYSE: BA), and Northrop Grumman (NYSE: NOC).
The Company
Lockheed Martin is the top military contractor, earning a hefty $10.9 billion in 2010. The company has used creations like the C-130 Hercules, the F-22 Raptor fighter jet and the F-35 Lightning II fighter to stake its claim to that top spot. These and other innovations have pushed the company’s total market cap to more then $28 billion, of which nearly 40% is from military efforts.
Trading around $90 per share, Lockheed’s share price has risen nearly 12% over the past year. In addition, the company pays an excellent $4 annual dividend (for a 4.4% yield); this blend of growth and dividend makes the stock very appealing for investors that are building their portfolio.
How the Competition Stacks Up
Lockheed isn’t the only company among the defense contractors to post some solid numbers over the past year. The Boeing Company has used the launch of its long-awaited 787 and its involvement in Lockheed’s F-35 Lightning project to generate returns for investors. Although the debut of the 787 was about three years behind schedule, the company is now boosting production while increasing both quarterly revenue and earnings (up 18.2% and 19.7%, respectively).
Contributing as a subcontractor on the F-35, Boeing holds the 3rd place spot on the defense contractor list, generating more than $5 billion in military-related revenue in 2010. In addition, the company delivered its 1,000th Boeing 777 recently, helping to maintain the company’s share price of around $73. I like the potential growth this stock is showing (a one-year target of nearly $85 per share), and combined with its $1.76 annual dividend (for a 2.3% yield), this has the makings of a powerful mixed growth and dividend stock.
Another defense contractor who pays great dividends ($2 per share at a yield of 3.2%) is Northrop Grumman. After securing the 2nd spot on the defense contractor list by generating almost $8.3 billion in 2010, the company came back strong in 2011, turning a 5.8% quarterly revenue loss into 45.7% earnings growth for the year. The company has been involved in efforts such as a joint venture with Brazilian plane maker Embraer for a NATO training jet and also as one of the lead companies on the airborne missile-defense system.
I believe that Northrop Grumman is poised to be a good investment in the future, even though its current performance is a bit lackluster. The company’s one-year target estimate of $60.50 is flat, but the stock has been more bullish recently, climbing to a level near $61.50. In addition, its earnings to price ratio is 7.94, its price to book ratio also low at 1.48 and its debt to equity of 38 all help to indicate that the stock has room to grow. That said, I think investors should pay attention to developments with NASA’s James Webb Space Telescope, as Northrop Grumman is getting criticized for project delays and cost overruns; this could have an impact on profits going forward for this large contractor.
Is Lockheed Martin Ready to Soar?
The business of the United States military is a fickle beast, and contractors are always struggling to maintain performance while increasing profits. This balance can make profits tricky to maintain; I think it is fair for Lockheed Martin investors to ask questions about the company’s profitability going forward.
On the positive side, the company has a solid reputation for performance, and it is in good standing with the Pentagon. The F-35 series of fighter planes is a huge victory for the company, and orders will continue for some time as foreign countries look to upgrade their air forces as well. I see the stock performing well, and Lockheed’s dividend is solid enough that it draws long-term investors, making it a very desirable holding.
On the negative side of the ledger, investors have to be concerned with the inquiry into the F-35 program. While performance of the fighter has improved, drawing praise from Defense Secretary Leon Panetta, there is growing problems with the financial aspect of the project.
Citing a Pentagon rule that payments can be withheld from a contractor to correct deficiencies or budget problems, the government is holding back $1 million per month until Lockheed demonstrates that it has its bookkeeping problems corrected. These developments signal a short-term problem that could have longer-term implications.
Neither the media nor Wall Street reacts favorably to negative news like this, especially when billions of dollars are on the line. This news, coupled with Lockheed’s burgeoning financial strain (debt to equity ratio of over 645) and its stock appearing to be oversold (price to book ratio of 28.34) concern me about the company at the present time. Although I view Lockheed Martin as a stock in the long-term, I feel these issues diminish its short-term appeal. I would only recommend this stock for dividend investors until it resolves this issues.
While I am neutral on Northrop Grumman due to its flat performance and the quality issues on the Webb Space Telescope, I do have Boeing listed as a buy. The company is posting strong numbers, and demand continues to rise for its key products. The defense business is tough, and companies like these face new challenges every day. While all three are likely to be strong in the near future, I believe Boeing is best equipped to succeed at the current time.
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