Lockheed Martin Stock: Why Waiting May Be Better

Lockheed Martin Stock

Lockheed Martin Stock (NYSE:LMT)

Lockheed Martin (NYSE:LMT) is an excellent income investment with a promising long-term future. However, shares have risen significantly since the outbreak of the Ukrainian conflict, and they are now trading at a slight premium to their historical valuation. Lockheed Martin will certainly announce solid earnings next week, but investors may be better off waiting for a more appealing entry price.

What the Market Expects

Lockheed Martin will release its next quarterly earnings report on Tuesday, April 18. The corporation will release its earnings before the market opens.

Analysts on Wall Street currently believe that Lockheed Martin will announce decent, but not remarkable, results. Revenues are expected to be $15.0 billion, unchanged from the previous year’s first quarter. In actual terms, this would result in a sales decline, as inflation has been running at a significant rate over the last year.

Analysts expect that Lockheed Martin will announce earnings per share of $6.07 for the quarter, a 5% decrease from the previous year’s first quarter.

However, before dismissing these projections as too pessimistic, investors should examine three factors:

– To begin with, the defense industry can be lumpy. Depending on the delivery of some products manufactured by the company, particularly those with higher price tags, there may be quarterly ups and downs that may not mean much in the long run.

– Second, the company’s performance over the last two years has been impressive, with Lockheed Martin achieving impressive earnings growth. With difficult comparisons, somewhat worse relative performance in early 2023 isn’t dramatic.

– Finally, Lockheed Martin has the potential to surpass expectations. Indeed, one could argue that this possibility is very strong, given that Lockheed Martin has outperformed Wall Street’s earnings per share projections in 16 of the last 20 quarters (or five years). It wouldn’t be shocking if the company topped projections again, so actual earnings per share might be greater than what Wall Street is expecting today.

What Investors Should Watch 

While Lockheed Martin’s sales and profits per share are likely to attract the most attention, investors should keep an eye on a few other key data.

Lockheed Martin’s order intake and backlog are included. While the company’s backlog does not instantly translate into revenue and profits, it will do so over time; the bigger the order intake and backlog, the greater Lockheed Martin’s future revenue potential. A high order intake and a large backlog number are also crucial for two additional reasons. First, a high backlog, all else being equal, makes the organization more resilient. When Lockheed Martin has long-term revenue commitments, it is better positioned to endure short-term challenges, such as periods when a few new orders are placed. Second, a high order intake and a huge and expanding backlog indicate that the company’s products are appealing and that R&D efforts are bearing fruit; otherwise, customers would not place fresh orders with the company. When a corporation performs well in research and development, it is more likely to perform well in the long run. Of course, things might change, but it seems reasonable to assume that a corporation with a high-performing and efficient R&D department will be able to generate strong products in the future as well.

Investors should also keep an eye out for updates on Lockheed Martin’s future shareholder return plans. Retail investors prefer the company because of its dividend, which now yields 2.5% and has been increased for 20 years in a row, with an 8% average annual growth rate over the last five years. However, the dividend is not the only avenue for management to repay the capital to shareholders. Instead, Lockheed Martin is returning capital to investors through share repurchases, which have historically been very effective. The dividend was last increased in September, therefore Lockheed Martin is unlikely to announce a dividend increase in the next months; instead, it will most likely occur in September or October, as it does most years. Lockheed Martin may revise its share repurchase intentions, and it will almost certainly inform investors about its buyback spending in the most recent quarter.

Lockheed Martin’s share count has fallen by slightly more than 20% over the last decade, resulting in an increase in earnings per share of more than 25% over the same period. The corporation might lower its share count by roughly 5% under the existing $6 billion buyback authorization. As a result, it would not be shocking if Lockheed Martin reduced its share count by more than 2% this year. That again, it’s possible that Lockheed Martin’s management chooses against a rapid buyback pace because shares aren’t precisely cheap right now — ideally, buybacks are done when a company’s shares are selling below fair value because buybacks are most accretive under those conditions. That is not the situation now, which brings us to the following issue.

Lockheed Martin’s Market Value and Prospects

Lockheed Martin is a high-quality corporation with a proven track record, stable operations, and tremendous long-term growth potential. But values are important, and Lockheed Martin stock isn’t cheap right now.

Lockheed Martin is currently selling at 18.2x net earnings based on current consensus expectations for 2023. This suggests that shares are currently trading at a slight premium to the 5-year and 10-year median earnings multiples of 17.9 and 17.6, respectively. Interest rates were lower in the last five and 10 years than they are now, and yet Lockheed Martin was, on average, cheaper in the past compared to how shares are valued now. All else being equal, higher interest rates should result in lower market prices. While I don’t believe Lockheed Martin is particularly pricey today, shares aren’t a steal, either in absolute terms or in comparison to how the firm was valued in the past. Lockheed Martin appears to be trading somewhat above fair value at the moment.

This implies that currently isn’t the best moment to invest in the company, while Lockheed Martin’s shares can still climb in the long run as the underlying business grows and LMT continues to cut its share count while raising dividends over time.

Increased military spending by the United States and other NATO countries will be long-term growth drivers. Countries in Europe, particularly those who have not spent much money on their military in the past, will be pushed to spend more on defense equipment in order to achieve NATO expenditure goals and increase the performance and capabilities of their military. Non-NATO US partners, such as South Korea and Japan, are expanding their defense spending over time, creating prospects for Lockheed Martin.

While the space and nuclear technology sectors aren’t particularly huge today, they provide enormous long-term development potential for Lockheed Martin, at least if the corporation can accomplish its lofty goals and its R&D efforts pay off.

Last Thoughts

Overall, Lockheed Martin appears to be a high-quality company with many appealing characteristics: it is resilient due to long-term government contracts, it has significant growth potential, it is shareholder-friendly and returns billions of dollars to its owners each year, and its dividend is both safe and growing rapidly.

At the same time, Lockheed Martin is currently trading at a premium to how shares were previously valued. In absolute terms, Lockheed Martin stock is likewise not inexpensive right now. The stock has received a lot of buzz since the start of the Russia-Ukraine war, which means that I believe now is not the best moment to invest in Lockheed Martin. Waiting for a better purchase opportunity may be worthwhile.

Featured Image: Megapixl © Mohammedsoliman4

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About the author: Stephanie Bedard-Chateauneuf has over six years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on tech stocks, consumer stocks, health stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.