Investment Thesis

Lockheed Martin Corporation (LMT) is the world's largest defense contractor focused on key government programs in the U.S. and with other nations around the world. During the past ten years, LMT has produced an annual total return of 21.5% and yearly dividend growth of 14.0%.

The pandemic has had a significant impact on LMT, reducing the number of F-35s to be delivered from141 to 123 planes. In addition, the recent U.S. elections have raised concerns about potential budget cuts or program modifications that could adversely affect LMT. During the past 12 months, the stock price dropped 26% despite achieving record FY 2020 results for sales, operating profits, cash flow, and backlog levels across the four business segments.

Lockheed Martin is well-positioned to perform in FY 2021, currently trading in the margin of safety, and offering a high yield of 3.23%. I will describe why I believe that Lockheed Martin is a strong buying opportunity.

Business Profile

Lockheed Martin is a global security and aerospace company and is principally engaged in the research, design, development, manufacture, integration, and sustainment of advanced technology systems, products, and services. LMT operates through four business segments:

Aeronautics, includes tactical aircraft, airlift, and aeronautical research and development lines of business. The major programs are:

• F-35 Lightning II Joint Strike Fighter - international multi-role, multi-variant, fifth-generation stealth fighter.
• C-130 Hercules - international tactical airlifted.
• F-16 Fighting Falcon - low-cost, combat-proven, international multi-role fighter.
• F-22 Raptor - air dominance and multi-mission fifth-generation stealth fighter.

Missiles and Fire Control, includes the major programs:

• Terminal High Altitude Area Defense System.
• The Patriot Advanced Capability-3 Missiles.
• Multiple Launch Rocket System, Hellfire, Joint Air-to-Surface Standoff Missile, and Javelin tactical missile programs.

Rotary and Mission Systems, includes the major programs:

• The Black Hawk and Seahawk helicopters manufactured for the U.S. and foreign governments.
• Aegis Combat System serves as an air and missile defense system for the U.S. Navy and international customers and is also a sea and land-based element of the U.S. missile defense system.
• The CH-53K King Stallion helicopter delivering the next-generation heavy-lift helicopter for the U.S. Marine Corps.

Space, includes space launch, commercial satellites, government satellites, and strategic missiles lines of business. The major programs include:

• The Trident II D5 fleet ballistic missile, a program with the U.S. Navy for the only submarine-launched intercontinental ballistic missile currently in production in the U.S.
• Orion Multi-Purpose Crew Vehicle, a spacecraft for the National Aeronautics and Space Administration utilizing new technology for human exploration missions beyond low earth orbit.
• Global Positioning System III, a program to modernize the satellite system for the U.S. Air Force.
• Hypersonics programs, several programs with the U.S. Air Force, U.S. Army, and U.S. Navy to design, develop and build hypersonic strike weapons.

Revenues by Business Segment

Source: LMT FY 2020 Q4 Earnings Call

On LMT's Q4 2020 call, CEO Jim Taiclet discussed the outstanding results across its four business segments. The results are remarkable given the pandemic as a backdrop and the negative impact on its business, particularly on the F-35 production schedule, down from 134 planes (2019) to 123 (2020). Initially, the target was 141 planes for 2020.

Current Department of Defense plans call for acquiring a total of 2,456 F-35s. U.S. allies intend to purchase hundreds of additional F-35s, and eight nations are cost-sharing partners in the program with the United States. The program will cost the taxpayer over $1.5 trillion during the 60-year life span.

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