I love defense and aerospace stocks such as Lockheed Martin Corporation (NYSE:LMT). I love them for many reasons, and LMT stock epitomizes all of them.
For starters, LMT stock is part of an oligopoly. There are not that many mega-contractors out there. Defense and aerospace is obviously a highly-specialized industry. Therefore, when a customer needs to order something in this industry, LMT stock is likely going to be in the running for the order.
The order is also likely to be large and expensive, because defense and aerospace is — as mentioned — highly specialized. Things tend to get ordered in bulk. Consider Belgium, which just put in a multi-billion dollar order for F-35 fighter jets from Lockheed Martin. That adds revenues for LMT stock.
Did I mention Belgium? Yes. Because the biggest customers of LMT and its peers are going to be governments. They have lots and lots of money to spend. And defense is pretty much a necessity for every advanced nation.
Even when the dovish Obama administration was in power, times were still good for the sector. In fact, in many ways, defense is like fast food. With fast food, when the economy stinks, the sector does well. When the economy is great, the sector does great.
With defense, when the boss is dovish, things are good. When the boss is hawkish, things are great. How great? In the last conference call, Lockheed mentioned it has a $104-billion backlog.
How many businesses can say that they have a high degree of certainty about where their next $104 billion in revenue is coming from?
There’s also this from the last conference call:
We are encouraged, though, that both the House and Senate have passed their versions of the 2018 National Defense Authorization Act bill each by wide margins in a broad show of support. The House is recommending a base defense budget of approximately $593 billion, with the Senate putting forth a target of about $611 billion and these two positions must now be reconciled in conference. Each of these budget proposals reflect significant increases over both President Trump’s $575 billion request and fiscal year 2017 enacted amounts.
Defense is a good business.
Bottom Line on LMT
So how are Lockheed stock financials looking?
Fiscal year 2016 saw operating income of $3.75 billion. The first nine months of 2017 alone produced slightly over $4 billion alone. So obviously, things are looking good. Looking at the bottom line for the trailing 12 months (TTM), we get $3.6 billion. Lockheed Martin stock is thus trading at 27x TTM net income. However, with the tax cut coming into play, LMT should save about $450 million in the coming year alone.
The balance sheet looks particularly nifty, with $2.94 billion in cash. Long-term debt is $14.27 billion. The $663 million in debt service equates to about a 4.5% interest rate.
Lockheed stock also has a very consistent track record with respect to cash flow. Operating cash flow has been over $5 billion the past three years with free cash flow settling in at just under $4 billion. A mere 10% of that money goes to the dividend.
I consider defense a must-own in some form in any long-term diversified portfolio. You can do a lot worse than LMT stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. Meyers has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. He can be reached at [email protected].