Lockheed Martin is vastly undervalued (NYSE:LMT)


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Lockheed Martin (New York stock market :New York Stock Exchange: LMT) was an outlier in the 2022 bear market. The stock has significantly outperformed the S&P 500 for a variety of exogenous and endogenous reasons. However, many investors might be coy about the stock given the bear market persistence and Lockheed’s second quarter results are missing.

Although Lockheed has some challenges ahead, we believe the stock is well positioned to outperform the broader market through the end of the year and possibly beyond; Here’s why.

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Data by YCharts

Operational Review

Although a well-diversified business, aerospace is Lockheed’s cash cow. The company’s F-35 fighter jets are clearly popular, and its latest $6 billion supply contract with the Swiss government proves it. In addition, the company’s Missiles and Fire Control operating margins widened by 4.2% (YOY) into its second financial quarter, which is impressive given last year’s surge in inflation.

Cumulatively, Lockheed is growing at a compound annual growth rate of 5.51%which is more than solid for a company that operates in a mature sector.

LMT Sales

Statistical

10-Q

Lockheed Martin

A closer analysis of Lockheed’s income statement reflects the company’s resilience in a difficult macroeconomic climate. Lockheed’s Degree of Operating Leverage (DOL) of 8.6x means the company’s operating profits are not too sensitive to its sales. Therefore, Lockheed shares can certainly be considered a recession-proof asset.

Source: Alpha Research

Finally, Lockheed’s cash flow statement communicates two things investors should be optimistic about. The first is the increase in the remuneration of the company’s shareholders from one year to the next (see the diagram below). Taken in isolation, the company’s aggressive stock buybacks support a higher valuation, offering investors potential support for capital gains.

The second feature I would like to highlight is Lockheed’s aggressive CapEx, which could help the company’s overall growth.

10-Q

Lockheed Martin

Geopolitical friction

I’m sure you’ve heard that the era of moderation is coming to an end. But what does that mean exactly?

Economic growth over the past 40 years has been moderate and supported by moderate inflation. This period of moderation came after the post-World War II period of growth, when the economy went into overdrive.

What caused moderation to fall?

Factors such as the divergence between world powers, rising inflation in exporting countries and slowing labor productivity in developed countries have led to a significant slowdown in global economic growth in recent years. Additionally, artificial economic stimuli and supply chain issues during the COVID-19 pandemic acted as catalysts for what could be the end of moderation.

Why is all this important for Lockheed Martin?

The end of moderation plays a key role in Lockheed’s potential sales. World leaders are not unaware of post-moderation symptoms, which are usually characterized by global conflict. Evidence suggests conflict is brewing with war in Ukraine, the rise of right-wing populism in Europe and North America, surreal civil strife in emerging nations like Sri Lanka, and rising tensions in the China Sea. southern. Therefore, governments are likely to start sourcing defense systems, as we have seen recently with Germany $107 billion increase in defense spending.

Lockheed is a key supplier to various governments (including the United States) and supplies various private markets around the world. Essentially, various systemic tailwinds could help Lockheed in the years to come.

High Yield Attributes

Lockheed’s dividend yields an impressive 2.90% and is well covered by $8.95 billion in operating cash. Stock recorded 19 consecutive years of dividend growth, thus developing a loyal investor base as evidenced by its low Beta coefficient (0.66x), which qualifies the action as a low volatility investment.

D. Yield (before) 2.90%
Dividend coverage 2.36x
Operating cash flow $8.95 billion

Source: Alpha Research

Dividend Information

Looking for Alpha

Lockheed’s high dividend yield not only provides investors with excellent prospects for income generation, but also places the stock in a popular market segment. I say this because high dividend stocks have outperformed the S&P 500 over the past year due to risk aversion (among many reasons).

Also, I mentioned Lockheed’s beta coefficient for a specific reason. The chart below shows that low volatility stocks have also outperformed the broader market over the past year, which is typical during times of economic turmoil.

Collectively, Lockheed is characterized as a high-yield, low-volatility stock, which is precisely the type of asset to own in today’s risk-free market climate.

Factor performance

Koyfin

Potential risks

While I’m generally bullish on Lockheed shares, there are a few concerns investors should take note of.

First, Lockheed is clearly suffering from rising input costs as its gross profit margin of 13.39% is squeezed. Additionally, Lockheed’s missed second-quarter results included slower growth in key segments, with its Aerospace and Space segments declining 12% (year-on-year) and 11% (year-on-year), respectively. Although I expect a recovery in these segments, it is clear that a potential slowdown in growth must be taken into account.

Chart
Data by YCharts

Additionally, Lockheed’s Sharpe ratio falls below 1; therefore, the stock should be considered to have poor risk/reward prospects from a quantitative perspective. Additionally, the stock’s 5% monthly VaR of 9.82% means that it tends to fall more than 9.82% for at least 5% of its trading months, which is not great to see during a bear market.

Chart
Data by YCharts

Final Thoughts

Lockheed is classified as a low volatility, high yielding stock, putting it in an ideal segment to outperform today’s shaky market. Additionally, Lockheed’s operational efficiency is admirable as it exhibits a high degree of operational leverage.

Finally, Lockheed offers attractive remuneration to shareholders with share buybacks reinforcing the valuation of the action.

If you’re interested in more advanced analysis, be sure to keep an eye out for our soon-to-be-launched marketplace program, “The Factor Investing Hub”. FIH is an AI-driven “smart beta/factor investing” portfolio management concept with the goal of balancing long-term portfolios against “factors”.

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