The shares of Lockheed Martin Corporation (NYSE:LMT) have been sputtering lately, going from $361 to $342. But this has not been isolated to Lockheed Martin stock.
Other defense contractors have also seen volatility, such as Northrop Grumman Corporation (NYSE:NOC), Raytheon Company (NYSE:RTN) and Boeing Co (NYSE:BA).
But in the case of Lockheed Martin stock, there is something that is particularly critical – that is, the F-35 combat jet. This is a 5th generation fighter that has stealth capabilities, laser-precision targeting, network-enabled operations and an integrated view of the battlefield.
There are also three versions of the F-35, so as to deal with different types of runways and engagements. For example, the F35B can take off and land vertically and the F35C is for aircraft carriers.
But to the consternation of investors in Lockheed Martin stock, the fighter has had many challenges. There have been design flaws, issues with safety and delays.
Yet perhaps the biggest issue is the cost. Note that it is expected to be about $1.5 trillion!
In light of all this, the Pentagon is trying to find ways to realize efficiencies. Let’s face it, even though the defense budget is massive – and is expected to continue to increase at a healthy pace – the resources are still limited.
Looking Ahead for Lockheed Martin stock
Currently, Lockheed Martin is in negotiations to come up with a plan. And it looks like it will involve a commitment to provide upfront funding for a large order. The idea is that this should allow for more economies of scale.
What’s more, LMT has already had success in bringing down the costs of the aircraft. During the past five years, the average cost has gone from $122 million to $95 million. The goal is to get to $80 million by 2020.
OK then, so what might this mean for LMT stock? Will there further pressure? Perhaps. But then again, the Pentagon has already invested tremendous resources in the F-35. It’s also important to make sure that LMT has the incentive to keep up production. Basically, there is no alternative jet available.
Something else: The volumes of anticipated production are enormous and should help drive the long-term value of LMT stock. The Pentagon plans on purchasing as many as 2,400. And this does not include the orders from various other countries.
Lockheed Martin Stock snd Other Drivers
While the F-35 will be a big part of the revenue base for LMT, the fact remains that the company has other large businesses. There is the Missiles and Fire Control segment, which provides for missile defense, air-to-ground precision strike platforms and unmanned ground vehicles.
No doubt, these kinds of systems are essential and will likely see growth in the coming years, especially in light of the proliferation of nuclear weapons.
Then there is the Rotary and Mission Systems business, which generates over $14 billion in revenues. This includes the development of ships and other naval capabilities. Although, the division has gotten a nice boost from the acquisition of Sikorsky, a top manufacturer of helicopters.
And finally, LMT has a sizeable business with its Space segment. Last year, the sales came to $9.5 billion. A key part of this is the development of defensive missile systems.
Bottom Line On Lockheed Martin Stock
The valuation on LMT stock is actually at a reasonable valuation. Keep in mind that the forward price-to-earnings multiple is about 19X.
The company has also been mindful of shareholder value. Last year it returned more than $4 billion to shareholders — both in terms of in dividends and buybacks of LMT stock (note that the current yield is 2.4%).
And finally, there should be steady growth for the long-haul. After all, the backlog is at a staggering $104 billion. To put this in perspective, in 2017 the company posted sales of $51 billion.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
