The U.S. economy continues its steady recovery from the coronavirus pandemic. While many companies have seen their share prices rise significantly in 2021 as a reflection of the economic recovery, Lockheed Martin (NYSE:LMT) has been a notable exception.
Lockheed Martin stock has generated negative total returns of -2.6% year-to-date, while the broader S&P 500 has returned 17.2% so far this year. Nevertheless, Lockheed Martin remains a blue chip stock that should not be viewed in the same category as some of the growth stocks that have led the market so far in 2021.
Lockheed Martin continues to be a reliable dividend growth stock that has durable competitive advantages and long-term growth potential. We reiterate a buy rating on LMT stock.
Quarterly Earnings Review
Lockheed Martin registered another strong quarterly performance in Q2, with 5% year-over-year revenue growth. Each of the company’s four operating segments reported year-over-year revenue growth, led by 10% growth in the Space segment and 5% growth in the Rotary & Mission Systems segment.
Earnings per share increased 12.6% year-over-year to $6.52, from $5.79 in the year-ago quarter. Reflecting the company’s continued momentum, Lockheed Martin once again raised its full-year guidance after reporting Q2 results. For 2021, Lockheed Martin now expects revenue between $67.3 billion to $68.7 billion, along with diluted earnings per share of $26.70 – $27.00 for the year.
Future Growth Catalysts
Lockheed Martin has a long runway of growth up ahead. It ended the second quarter with a backlog of $142 billion, driven by increases in Missiles & Fire Control and Rotary & Mission Systems. Such a large project backlog bodes well for the company’s long-term growth.
Recently, Lockheed Martin has picked up multiple incremental wins that will further boost its growth. For example, in September alone the company secure the following contract wins:
- $208 million Naval Air Systems contract;
- $101 million modification contract for U.S. Army; and
- $2 billion logistics support & $412 million contract for Naval Air Systems.
In addition to its organic growth opportunities, Lockheed Martin is also looking forward to closing its $4.6 billion acquisition of Aerojet Rocketdyne Holdings (NYSE:ARJD), which will expand its propulsion systems services. Overall, we expect 8% annual earnings-per-share growth for Lockheed over the next five years.
Valuation & Expected Returns
Due to LMT’s declining share price and its strong earnings growth so far this year, shares look attractively priced right now. Based on the company’s revised full-year forecast, EPS is likely to come in around $26.85 at the midpoint of guidance. This represents an increase from previous guidance, which called for full-year EPS of $26.55, reflecting the company’s improving financials over the first three quarters. This means LMT stock is valued at a price-to-earnings ratio of ~12.6, which we believe is too low for a global industry leader with long-term growth potential.
Our fair value estimate is a P/E ratio of 16.0 means expansion of the P/E multiple could increase returns by 4.9% per year. When combined with the 8% anticipated EPS growth rate and 3.1% dividend yield, total return potential comes to 16.0% per year over the next five years. Therefore, we still rate Lockheed Martin stock as a buy, despite the weak share price performance over the course of 2021.
Lockheed Martin continues to perform well fundamentally, with strong growth in revenue and earnings-per-share. It remains a leader in the global defense industry, with a recession-resistant business model and a unique ability to raise its dividend each year. The share price still does not reflect Lockheed Martin’s strengths, but we remain bullish on the stock over the long-term.
On the date of publication, Bob Ciura was long LMT stock. He did not have (either directly or indirectly) any positions in the other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.