Lockheed: A "Defensive" Selection

06/02/2006 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

Charles Carlson views Lockheed Martin as a defense stock from two perspectives: the firm is not only a military defense systems maker, but also a defensive selection in the current market environment, as it continues to beat Wall Street expectations. Here’s his overview.

"Stock prices are driven by expectations. For example, ever wonder why a company that comes in with seemingly good profits gets bombed? Chances are, those good profits weren’t quite what Wall Street was expecting, thus disappointing investors and causing a sell-off. On the other hand, companies that consistently beat Wall Street’s expectations generally get accorded higher stock prices. One firm that has been exceeding expectations is Lockheed Martin (LMT NYSE).

"The firm has beaten Wall Street’s earnings estimates in each of the last four quarters, including per-share earnings in the most recent quarter that were nearly 18% higher than the Wall Street estimate. Lockheed Martin stock has enjoyed a steady rise since bottoming last year at $58. These shares remain an attractive value. The stock currently trades at 15 times the 2006 earnings estimate of $4.92, and that estimate may prove conservative. The stock, yielding 1.6%, should see continued dividend increases as earnings rise. The issue is a buy at current prices.

Lockheed Martin provides military aircraft and related technologies, satellites, strategic and defensive missile systems, and develops solutions supporting the command, control, communications, computers, intelligence, surveillance, and reconnaissance activities of the Department of Defense and intelligence agencies. The Information and Technology Services segment provides technology services to federal agencies and other customers. About 58% of total revenue comes from the Department of Defense.

"Lockheed Martin is coming off an impressive March quarter. Net earnings rose 60% on a 9% increase in revenues to $9.2 billion. Over the long term, Lockheed Martin should expect to get its lion’s share of defense spending, and spending on homeland security should also help keep the bottom line moving higher. Reflecting the strong earnings growth, the current quarterly dividend of $0.30 per share has more than doubled since the third quarter of 2003.

"Defense-related stocks will have some volatility as a result of periodic uncertainties over defense budgets. Still, the continued conflicts in the Middle East, as well as continued concern over homeland security, should keep spending at healthy levels. Lockheed Martin represents an excellent way to gain exposure to the defense and homeland-security markets.

"For those who invest in dividend reinvestment plays, we’d note that the firm’s direct-purchase plan permits initial purchases directly. Minimum initial investment is $250, but the firm will waive the initial minimum if an investor agrees to automatic monthly investment via electronic debit of a bank of account of at least $50. There is no enrollment fee and no fees to buy shares in the plan."

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