Two Votes for Lockheed

10/01/2002 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Two top advisors have recently selected the same stock–a leading defense contractor–as their latest featured recommendation. Bernie Schaeffer, a specialist in options and editor of The Option Advisor, recommends the stock for its near-term potential. Meanwhile, Leo Fasciocco, a leading technician and editor of The Ticker Tape Digest, anticipates a breakout and sees upside potential for both the next six months and through next year. Here are their reviews.

Lockheed-Martin (LMT NYSE), based in Bethesada, MD, is the world's largest defense contractor," says Fasciocco. "The company’s high-tech business includes missiles for both offense (Trident II) and defense (Theater High Altitude Area Defense) and high-profile planes such as the F-16 and F/A-22 jet fighters and the C-130J transport. The company is also the main contractor for the Joint Strike Fighter (J-35), the largest defense contract ever. The US government accounts for about 80% of sales. Annual revenues are $24 billion.

Technically, LMT is close to a breakout and the stock is acting well. The military stocks have regained their strength in recent weeks and many are now nearing new highs. The sector is strong because of the war on terror and possible military action in Iraq. A look at TTD’s weekly chart on LMT shows a powerful advance the past year-and-a-half, a sharp correction in the summer, and a subsequent rally. Technically, LMT appears to have completed its intermediate-term correction. It looks ready to embark on another move higher. That would be supported by improving earnings and strength in the military sector. A look at the weekly chart shows importantly that LMT remains under heavy accumulation. That is very important and shows no significant distribution. LMT needs to get through 67.30 to breakout.

We are forecasting a 19% increase in earnings this year to $2.55 a share from $2.15 a year ago. Looking ahead to 2003, we anticipate a 12% gain in net to $2.86 a share. The stock’s price earnings ratio is 25. LMT’s earnings growth is strong due to increased delivery of its high-margin F-16 fighter jets and lower interest costs. For the upcoming third quarter, we are looking for an 18% increase in third quarter profits to 70 cents a share from 59 cents a year ago. Going out to the fourth quarter, we see profits improving 22% to 82 cents a share from 67 cents a year ago.

LMT is a big cap play that is in the right spot. For a big firm, earnings growth looks solid and prospects for increased sales are quite possible. Insiders have been steady buyers the past several months. The latest buying came at 65 in September. We see LMT as a good big-cap play poised to breakout. A partial position can be taken now with a completed position to be taken on a breakout over 67.30. We are targeting LMT for a move to 80 within six months. A protective stop can be placed near 61. We rate LMT a conservative play that should work higher perhaps to 100 during the next 12 to 18 months.”

Lockheed-Martin is also a recent “Featured Stock” from Bernie Schaeffer, one of the market’s leading authorities on options. Says Bernie, “It certainly hasn't been pretty, but LMT weathered through the stock market's version of hurricane Isidore. The shares have been making higher highs in recent sessions, but have been unable to close at the high end of their price action. Thus, the equity has made little progress since my recommendation on September 20. I do like that LMT has overtaken its ten-day moving average while finding support at its 20-day moving average. An additional positive factor is that call open interest remains light overhead at its out-of-the-money calls in the front-month series. With the stock sitting slightly above 65, the at-the-money October 65 call holds 2,013 contracts while the out-of-the-money October 70 call holds 1,140 contracts. For a stock that has been a relative-strength leader since February 2000, and given the constant threat of war, speculators have been ignoring this issue. Traders should continue to target a move to 71.40 with a stop-loss on a close below 61.90."

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