The Best Defense is a Good Offense
12/29/2006 12:00 am EST
2007 is slated to be a year of vast political and economic change, with the War in Iraq playing a starring role. Here, Keith Fitz-Gerald points out an opportunity to make the most of an uncertain situation...
"I think the geopolitical front is about to get a whole lot hotter in 2007. Combine that with a public and a government that are getting much more impatient for better protection, and you've got tremendous profitable opportunities.
"Lockheed Martin (LMT NYSE) makes the super stealthy F-22 Strike Fighter, the F-35 Joint Strike Fighter, and the C-130 transport. That's quite a list of defense-related aircraft, and some might call that concentrated risk because if any one or all of these programs get eliminated, there is some risk of revenue loss.
"That's a valid concern, but I think it's very overblown. First, as advanced as the military is in many regards, our war-fighting equipment is pretty old. The F-14 Tomcat, which was recently retired, the F-15, F-16 and F-18 all have their roots in the 1970s. The B-52 first flew nearly 55 years ago and is expected to be operational through 2050.
"Even the F-117 Stealth and B-2 bombers are nearly 30 years old. While they can be upgraded, there is a limit to the effectiveness and the cost of doing so. In contrast, the F-22 and the F-35 both cruise for hours at a time at Mach 1.5 or faster which is, incidentally, something that older fighters can only do on afterburner. What's more, the newer jets can run their entire multihour mission profile at these speeds!
"The F-22 and F-35 appear no larger than a bumble bee on combat radars, adding to the compelling reasons to adopt the new technology. Comparatively, the F-15 looks like your bedroom door-stealthy--but still pretty big from a threat-assessment perspective.
"If you think LMT's product line is impressive, the numbers are even better. LMT has a $70 billion backlog, which is nearly twice annual sales, and free cash flow north of $3 billion annually. Free cash flow is exceptionally important to the mix because LMT is using it to aggressively pay down debt and expects to complete this process by mid-2008.
"LMT's yield, at 1.60%, is a little lower than I would like to see for normal Compound Growth Monsters, but the annualized dividend growth rate increase is 15.38% and a staggering 33.63% over the last three years. The EPS growth rate is a nice 44.61% even though sales are increasing by a mere 4.5% annually. Buy LMT under $90 and put it into your Compound Growth Monster portfolio."
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