There are few things better than having a government contract. It means guaranteed employment and revenue, often for years. Just look at defense contractor Lockheed Martin Corporation (NYSE:LMT).
Even during a time when the administration isn’t terribly high on the military, the defense contractor is doing okay. Things aren’t rosy, but they aren’t awful, either.
LMT Earnings: Not Bad, Not Great
LMT stock recently reported earnings of $2.74 per share, which was down 4.5% from $2.87 per share a year ago. Believe it or not, this appears to be due to lower fighter jet demand.
Revenues came in at $10.1 billion, a 5% decline that was spread across almost all of Lockheed Martin’s divisions. Aeronautics sales were down 7%, Information Systems were down 2%, and Missiles and Fire Control were down 19%. The modestly good news is that Mission Systems and Training sales rose 1% and Space Systems rose 5%.
Overall, though, things are rather lackluster. But the balance sheet is still in great shape. LMT stock has $3.5 billion in cash and $8.4 billion in debt.
Look, this administration clearly is not interested in the military. The attitude can be seen in everything from how the military welcomes President Obama with tepid applause when he speaks to the troops to the lower demand for military equipment in the budget.
This is balanced by the fact that America must have defense of some kind, and that will always be true. In fact, given the hostile attitude towards the military in this administration, I’m frankly surprised Lockheed earnings weren’t a lot worse. Fortunately, Lockheed Martin has a long history of being a big-time defense contractor and that’s just not going to change.
In fact, if we get a GOP President and Congress next year, I expect things will explode for Lockheed Martin and LMT stock.
In the meantime, Lockheed Martin pegs FY15 revenue to come in somewhere between $43.5 billion and $45 billion. There was a modest uptick in EPS range, by 5 cents on each end, to $10.85-$11.15 per share.
Lockheed Martin is going to be just fine even in the worst of times, and this is evident because LMT stock said it expects operational cash flow of $5 billion for FY15. With that much cash flow, and a backlog of almost $77 billion in order, I think LMT stock could be in much worse shape.
Bottom Line for LMT Stock
So what about LMT stock? Do you buy, hold, or sell? LMT stock trades at $196. That means it trades at a P/E of almost 18x earnings. Long-term earnings estimates are for 9% EPS growth, and LMT stock pays a 3% yield. I might give it a 10% or 15% premium for being a world-class brand name with robust cash flow … yet even then, it’s difficult to justify more than a 13x valuation, or $143.
I’m not a buyer at these levels, but if we get signals next year that a Conservative president might get elected, LMT stock will definitely be worth considering.
Lawrence Meyers does not own shares of LMT.
