Company Description: Lockheed Martin Corp., the world's largest military weapons manufacturer, is also a significant supplier to NASA and other non-defense government agencies. LMT receives about 93% of its revenues from global defense sales.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
LMT is trading at a premium to all four valuations above. Since LMT's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 9.1% premium to its calculated fair value of $115.47. LMT did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
LMT earned one Star in this section for 3.) above. LMT earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2003-2006, 2004-2007, 2005-2008, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1995 and has increased its dividend payments for 11 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
LMT earned a Star in this section for its NPV MMA Diff. of the $14,215. This amount is in excess of the $2,400 target I look for in a stock that has increased dividends as long as LMT has. The stock's current yield of 3.65% exceeds the 3.22% estimated 20-year average MMA rate.
Memberships and Peers: LMT is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Boeing Co. (BA) with a 1.8% yield, Northrop Grumman Corporation (NOC) with a 2.6% yield and United Technologies Corp. (UTX) with a 2.1% yield.
Conclusion: LMT did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks LMT as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $243.37 before LMT's NPV MMA Differential decreased to the $2,400 minimum that I look for in a stock with 11 years of consecutive dividend increases. At that price the stock would yield 1.9%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,400 NPV MMA Differential, the calculated rate is 9.0%. This dividend growth rate is equal to the 9.0% used in this analysis, thus providing no margin of safety. LMT has a risk rating of 1.75 which classifies it as a Medium risk stock.
LMT is the largest defense contractor in the world and dominates next-generation defense platforms. It owns supply contracts for key programs such as the F-35, which assures the company multiple years of revenue. However, LMT is dependent on government funding. U.S. defense spending over the next several years will likely worsen as the U.S. continues to wind down Overseas Operational Contingency spending and the impact of sequestration begins to kick in by year end. In an attempt to maintain operating margins, the firm proactively reduced head count to 120,000 in 2012 from 146,000 in 2008.
I am also concerned with the company's continued increase in its free cash flow payout (73% up from 62% in February 2013) and high debt to total capital (90% up from 75% in February 2013). In addition LMT is trading at a premium to my calculated fair value of $115.70. Given these concerns, I will not add to my position at this time.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in LMT (0.5% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: [LMT] [BA] [NOC] [UTX]