Lockheed Martin Stock Looks Expensive … For Now

Lockheed-Martin-stockLockheed Martin (NYSE: LMT) reported lackluster earnings Tuesday. There’s both good and bad news tied up in the earnings report. Let’s look at the numbers and then talk about the company’s prospects for both the short term and long term.

The company reported earnings per share of $2.74. That beat estimates handily, but it still fell 4.5% year-over-year. The reason is pretty obvious: revenues were $10.1 billion, which was a 5% drop.

Only two of the company’s five divisions escaped a downdraft in revenues. Mission Systems and Training sales rose 1% and Space Systems rose 5%. However, Aeronautics sales fell 7%, Information Systems dropped 2%, and Missiles and Fire Control were down a really ugly 19%.

The balance sheet remains a bright spot, as I would expect from this legacy company. It has $3.45 billion in cash and $8.4 billion in debt.

Lockheed Martin has a few things going against it, although I have to wonder if they aren’t temporary in nature. In the short term, I think the company will struggle a bit. I’m sorry to say that the Obama administration isn’t fond of military spending. It just isn’t.

The offset to this is that America must have defense and a military of some kind. So while some defense companies are suffering under the current administration, the good news is that times change, and at some point this is going to reverse.

Still, the fact that the country must have military forces (and airplanes and missiles and all the stuff that goes along with it) also means that Lockheed Martin is going to have business – probably forever. Heck, even though times aren’t good, the company’s backlog is still $77 billion.

Some might even say that earnings could have been a lot worse, and I’d be in that camp.

Should America get a Republican president again, I expect things to improve for Lockheed Martin very quickly indeed.

As for fiscal year 2015, Lockheed Martin expects revenue between $43.5 billion and $45 billion. It also raised guidance just a bit, to $10.85-$11.15 per share, up 5 cents.

Moreover, I think those investing in Lockheed Martin for its 3% dividend are going to stay put. The company had about $3 billion in free cash flow last year and only paid out 60% of it as a dividend. It’s also been repurchasing shares, which won’t displease investors.

So what about Lockheed Martin stock? Right now, I think it’s pricey if you don’t own it. That is, it trades at a price-earnings ratio of 18 times earnings. Long-term earnings estimates from analysts project 9% EPS growth, and the stock pays a 3% yield.  So normally, I’d say fair value is 12 times estimates, plus maybe a 10% premium for its cash flow and another 10% for its brand name.

Still, that only takes us to a P/E ratio of 14.4. At best, you shouldn’t be paying more than $155 or so. The stock is at $196. I’d say not to buy here, but if you hold, you are okay if you plan to hold it for the very long term.

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Published by Wyatt Investment Research at