Whenever, and wherever, presidents gin up talk of war, it is supposed to be good to be in the arms business. Business is certainly good for Lockheed Martin (NYSE:LMT), but stock in the defense contractor had been up just 2.6% so far in 2018, closing Oct. 22 at $326.78. This is despite revenues growing at 8% per year, with net income of over $1.1 billion each quarter funding a dividend of $2 per share of LMT stock.
Going into earnings, analysts were expecting $4.32 per share of profit, and hoping for $4.51, on revenue of $13.14 billion. What they got was much better, earnings of $5.14 per share on revenue of $14.3 billion.
Revenue was up 16% from a year earlier, net income up a whopping 52%. The company raised its estimate for sales to the high end of previous estimates, $53 billion, and raised its earnings estimate to $17.50 per share, up from $16.75-$17.05 previously.
So why isn’t LMT stock rallying?
Good News Treated Badly
CEO Marillyn Hewson, recently dubbed the most powerful woman in business, should be taking a bow, but the market is not in a mood to reward good news now.
During the third quarter, Lockheed sales were strong across the board. It had more sales of its F-35 planes, with aeronautics revenue up 20%, missile sales were up 16%, and helicopter sales were up 14%. The space division was up 11% and the tax rate was a minuscule 6.5%, thanks to the 2017 tax cut and deductions for overseas derived intangible income.
The market responded to all this good news with a big “meh.” LMT stock is pretty much flat right after the bell, short of the fall in the Dow Jones Industrial Average and Nasdaq Composite, but still, it’s a loss.
Rather than looking at the past, analysts were excusing the fall by worrying about the future, specifically a host of deals with Saudi Arabia they feel could be at risk after the murder of journalist Jamal Khashoggi. There has been no indication from the Trump Administration that this is the case, but that still leaves the stock susceptible to general market trends, which are negative.
Too Good?
Investors looking for yield should see the pullback as a buying opportunity, given an attractive yield of 2.7%, fully covered by earnings, and the prospect of that continuing.
The problem seems to be that the market is so flush with what it considers good news, like record profits, lower taxes and an administration dedicated to rolling back legal barriers, that everything in the news inspires fear of the gravy train ending.
That seems to be the case here. Lockheed beat estimates for the third quarter as handily as it beat estimates for the second, but that beat was followed by a rise in the stock price. Since then analysts have been lowering their rating on the stock, mainly on valuation. The reaction to the good news in the face of downgrades should be for the stock to go up, but instead, it is falling — an indication that, whatever the problem is, it’s not at Lockheed.
The Bottom Line on LMT Stock
Lockheed announced earnings at a time of a “falling knife,” a stock market determined to fall and fall hard. These problems are hitting the stock on Oct. 23, like they’re hitting every stock, and they are a buying opportunity.
When the dust settles, investors looking for income, who aren’t put off by being in the war business, should be readying their buy orders.
It’s not you, Lockheed. It’s us.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.
