Summary
- Lockheed Martin Corporation is our favorite defense contractor.
- Through our rigorous discounted free cash analysis, we derive a fair value estimate of $432 per share of LMT.
- In this piece, we will highlight why we like Lockheed Martin's capital appreciation and dividend growth upside.
By Callum Turcan
Image Shown: Lockheed Martin Corporation’s financial performance has held up well in the face of the ongoing pandemic. Image Source: Lockheed Martin Corporation – Second Quarter of Fiscal 2020 IR Earnings Presentation
Our favorite defense contractor is Lockheed Martin Corporation (LMT) as we like its focus on fiscal discipline, its stable cash flows, its operational prowess, its nice dividend, and its promising growth outlook. Additionally, shares of LMT yield ~2.5% as of this writing and Lockheed Martin's per share quarterly payout has grown by roughly four-fold since 2009. The firm’s biggest growth driver for the foreseeable future is its F-35 jet fighter, though please note Lockheed Martin also has a major helicopter business after completing its purchase of Sikorsky Aircraft in November 2015. In this article, we will cover why we like Lockheed Martin and how we arrived at our fair value estimate of $432 per share of LMT.
Historical Financial Analysis
During the initial phases of the coronavirus (‘COVID-19’) pandemic, Lockheed Martin was able to continue churning out meaningful free cash flows, defined as net operating cash flow less capital expenditures. Over the first half of fiscal 2020 (period ended June 28, 2020), Lockheed Martin generated $3.9 billion in free cash flow, up 38% year-over-year. Lockheed Martin paid $1.4 billion covering its dividend obligations and another $1.0 billion repurchasing its stock during this period. Its net debt load shrank from $11.1 billion (inclusive of short-term debt) at the end of fiscal 2019 (period ended December 31, 2019) down to $9.8 billion (inclusive of short-term debt) as of June 28, 2020.
This strong performance is not an outlier, but part of a longer-term trend in the company’s financial and operational performance. Lockheed Martin has posted solid revenue growth on a GAAP basis over the past few fiscal years as you can see in the upcoming graphic below.
