Here’s Why Barclays Is Wrong on LMT Stock
Lockheed Martin Corporation (NYSE:LMT) stock has been under pressure this week after analysts at Barclays PLC downgraded the company on Monday, causing a momentary setback to LMT stockholders. But worry not, dear reader. Here’s why I believe the dip in LMT stock allows for a great entry point for prospective investors.
Barclays has underweighted LMT stock, setting a price target of $210.00 per share. Amid the favorable industry trends in play, I find Barclays’ downgrade of defense stocks to be counterintuitive. Following the Paris attacks and the Turkey-Russia tussle, international geopolitical tensions have been mounting. The Iraq-Syria war has opened doors for defense contractors to rake in millions in new contracts from the countries directly involved in the conflict, which are primarily NATO allies. All major defense contractors are poised to win from the tensions in the Middle East and Lockheed Martin remains the top contractor among them all.
Additionally, the country with the biggest annual spending on defense is, hands down, the U.S. (Source: “These charts show the immensity of the US’ defense budget,” Business Insider, August 31, 2015.) Our country has a continued and growing commitment to national security and defense. Last month, the Obama Administration approved another $607 billion for the annual defense budget, which bodes well for local contractors. Both the local and international environments are conducive to LMT stock’s future growth. Here are three reasons why I believe the company is the best value play in the defense and aerospace industry at this time.
1. The Fighter Series
Lockheed’s fighter jets have been the biggest winners for the company for decades. The “F-35” program alone contributed 20% to the company’s total revenue in the latest quarter. The “F-16,” “F-22,” and now the F-35 have long boasted strong domestic and international demand. This week, Singapore has sent in a $914-million upgrade order for its F-16s. Earlier last month, Britain posted a massive purchase order for Lockheed Martin’s F-35 jets, vowing to buy up 24 jets within the next seven years.
In addition to its F-series, the company has a number of other strong military aircraft lineups. The $9.0-billion helicopter lineup acquisition earlier this year has also proven to be a boon to the company. In fact, the “Sikorsky” division is already bringing in millions for Lockheed Martin from new contracts, in addition to the $150 million in expected annual synergies. (Source: “Sikorsky Awarded $940M Army Contract Modifications for Logistics, H-60 Technical Support,” Govcon Wire, December 1, 2015.) With an unbeatable portfolio like this, Lockheed has little to worry about competition.
2. The Space Program
Lockheed’s space systems segment makes up a small portion of its revenue, with more than 80% coming from its defense side. Granted the company did not have any big launches this year, so the segment momentarily took a backseat; however, the fact that management guided its estimates higher for this segment for the whole year bears a sign of optimism.
Lockheed has recently partnered with The Boeing Company to launch miniature satellites into space that will help companies, particularly those involved in the Internet and geophysics fields, to send and receive valuable data. These miniature satellites, dubbed “CubeSats,” are expected to receive robust demand in the coming years, bringing in about $100,000 per satellite. (Source: “Lockheed-Boeing rocket venture to launch micro satellites,” Reuters, November 19, 2015.)
The space industry is undergoing a massive shift this year, as Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin gear up to make the Martian dream a reality. Both of these privately held companies are making an effort to compete with the ULA (United Launch Alliance). Lockheed’s joint venture with Boeing makes it the biggest player in this industry.
With all the heavyweights investing in this industry, there’s no denying the fact that this industry is going to take off in the coming years and Lockheed will remain the leader in this space.
3. The Dividends
The last, but probably the best, reason why I love LMT stock is its long-term history of rewarding stockholders with dividend returns. The company pays a healthy dividend, an approximately three-percent yield, and it has consistently stepped up its dividend payout over the last decade. In addition, Lockheed Martin continues to reward shareholders with intermittent buybacks. Compared to the rest of the popular defense and aerospace stocks, including Raytheon Company (NYSE:RTN), Northrop Grumman Corporation (NYSE:NOC), General Dynamics Corporation (NYSE:GD), and The Boeing Company (NYSE:BA), Lockheed Martin boasts the best dividend yield and the highest return on equity at a stellar 96%.
The Bottom Line on LMT Stock
Lockheed Martin stock has been a promising value play, making a steady climb over the years. LMT stock has had a robust run of more than 13% year-to-date, more than 57% in two years, and more than 218% in five years. The company has been signing new defense contracts left and right and is the biggest defense contractor in the world in terms of revenue.
Rest assured, Barclays got it wrong on LMT stock.