A Look at Lockheed

03/12/2004 12:00 am EST

Focus:

Jon Markman

Editor, Trader's Advantage

For those aware of the risks in trading, StockTactics Advisor is an exceptional advisory service. Jon Markman develops various portfolios designed around such themes as value, momentum, short sales, insiders, and "cheap thrills." Here's one of his latest "swing" trades.

"This range-bound market has been like water torture–up a little, down a little. But if you are a long-term investor with a bullish point of view, periods like this are very often the best times for accumulating beaten down stocks at good prices. One such interesting name hitting potential support price levels is Lockheed Martin (LMT NYSE).  T he aerospace giant’s shares have tumbled since late January after being hit by three rockets: First, the company issued 2004 earnings guidance that was below expectations. Second, it announced the retirement of its popular CEO. Third, the Pentagon announced the cancellation of a rival’s $38 billion Comanche helicopter project, casting fear that its own projects could be cancelled.

"The stock has fallen to $45 from $52 in the past month and it’s well off its post 9-11 high of $71, which it touched in mid 2002. In recent trading, the stock has also fallen below its 200-day moving average, which should ultimately offer technical support. This area has offered a lot of support in the past. It traded as low as $40.50 just before the Iraq war. Of course, this is just technical 'jabber' for explaining that this general area seems like a good place to start a position in one of the three preeminent defense contractors in the world.

"The selling seems overdone, and the valuation may be close to compelling for major institutions. Lockheed’s p/e multiple of 19.5 seems reasonable for a major Pentagon supplier expected to grow in the low double-digits, and is slightly below its five-year average. Its price-to-sales multiple of 0.65 is also slightly below its five-year average. Yet, the company’s most important source of new revenue–the F-22 land-based Fighter jet and the F-35 Joint Strike Fighter–are not considered in danger. For what it’s worth, defense analysts at UBS Securities consider Lockheed their best pick in the defense sector at this time, figuring it will generate $2.5 to $3 billion in free cash flow over the next two years and will look for ways to return increasing amounts to shareholders.

"To be sure, Lockheed has lagged its major competitors such as General Dynamics, Boeing, and Northrop over the past year. But as the stock comes into an area that has technically served as a springboard in the past, the shares might be worth consideration. There are three ways to play this stock:

  • Buy the shares between $40 and $45, and be patient. In a decent market, LMT should work its way back up to $52-$55 by year-end. A move from $42 to $55 would be 26%, which would be great considering you are also pulling in a 2% dividend yield. (UBS’ target, based on discounted cash flow, is $60.)
  • Buy the stock on a move above $46 on strong volume. That would be a signal that institutions have validated this idea. This is the safest strategy.
  • Buy the long dated call options on Lockheed, such as the January 2005, with strike prices of $40, $45, and $50. These options are currently selling at prices of $7.10, $4, and $2, respectively."

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