The company consists of four business segments: Aeronautics (~40% sales) — which produces military aircraft like the F-35, F-22, F-16, and C-130; Rotary and Mission Systems (~26% sales) — which houses combat ships, naval electronics, and helicopters; Missiles and Fire Control (~16% sales) — which creates missile defense systems; and Space Systems (~17% sales) — which produces satellites.
Lockheed Martin reported second-quarter results on July 26th. The company gave a “beat-and-raise” quarter. Net sales increased 5% to $17 billion, while adjusted earnings per share (EPS) came to $7.13. All four business segments again increased net sales.
Lockheed Martin ended the quarter with a backlog of $141.66 billion, driven by increases in Missiles & Fire Control, and Space but offset by declines in Aeronautics, and Rotary & Missions Systems. The company also lifted its full-year guidance, now expecting net sales of $67.3 billion to $68.34 billion and EPS of $26.70 to $27.00, compared with the prior outlook of $26.40 to $26.70.
Lockheed Martin is an entrenched military contractor. It produces aircraft and other platforms that serve as the backbone for the U.S. military, and other militaries around the world. This leads to a competitive advantage as any new technologies would have to significantly outperform existing platforms.
These platforms have decades long life cycles and Lockheed Martin has the expertise and experience to perform sustainment and modernization.
In addition, these characteristics lead to a good degree of recession resistance. During the 2008 through 2011 period, Lockheed Martin generated earnings-per-share of $7.86, $7.78, $7.23, and $7.82, while the dividend kept on increasing.
In the 2011 through 2020 period, Lockheed Martin grew its earnings-per-share by a 13.5% average annual compound rate. This result was driven by 3.9% yearly revenue growth that was significantly aided by a profit margin increasing from 5.7% to 10.5% and a share count that declined by 1.6% per year.
Growth will come organically as well as through acquisitions, such as the company’s recent $4.6 billion takeover of Aerojet Rocketdyne Holdings. The acquisition will boost Lockheed’s propulsion systems services. Moving forward we expect 8% annual earnings-per-share growth for the company.
We expect Lockheed Martin to generate earnings-per-share of $26.85 in 2021. Based on this, the stock is currently trading at a price-to-earnings ratio (P/E) of 13.9. Our fair value estimate is a P/E of 16.0, which means expansion of the P/E multiple could increase returns by 2.7% per year.
When combined with the 8% anticipated EPS growth rate and 2.8% dividend yield, total return potential comes to 13.1% per year over the next half-decade.