Shares of aerospace and defense contractor Lockheed Martin (NYSE:LMT) have rushed to all-time highs in early 2020, supported by a blockbuster fourth quarter earnings report delivered in late January which comprised headline-beating numbers, a record backlog, and a strong outlook.
All in all, Lockheed Martin appears to be firing on all cylinders, and a result, shareholders are pushing LMT stock up to all-time highs.
Can this winning dynamic continue for the foreseeable future? I think so. Mostly because the company projects to sustain robust operational momentum, and because the stock is still relatively cheap.
As such, I’d stick with the rally in Lockheed Martin stock. Shares aren’t done flying higher just yet.
Big Growth will Stick Around
Lockheed Martin just wrapped up a year wherein revenues rose 11% to a record high, operating profits rose 12% to a record high, and the order backlog rose 11% to a record high.
While this big growth trajectory may slow going forward against tougher laps, it will largely stick around for three big reasons.
First, you have the Trump factor. U.S. President Donald Trump loves to spend big on defense and military projects. That creates a natural tailwind for Lockheed Martin in the U.S. But, it also creates international tailwinds, because when the U.S. ups its defense and military spend, so does the rest of the world. That’s why, in 2019, global military spend actually reported its biggest growth rate in a decade.
Yes, Trump’s presidency will be challenged in 2020. But most signs point to his re-election, meaning another four years of Trump, and another four years of increased global military spend. Against that backdrop, Lockheed Martin should sustain a healthy growth trajectory.
Second, you have the F-35 tailwind. Lockheed Martin’s F-35 business is on fire, driven by higher global demand for next-generation fighter jets. Demand for these jets will only grow, as the international business keeps expanding and as costs keep coming down (making the jets cheaper and more affordable for customers).
Third, you have expansion of the Sikorsky helicopter business. Wall Street Journal did a great piece on the growth potential of this business and long story short, the company is chasing after some pretty big government contracts for Sikorsky. Winning any or multiple of them could result in huge growth for the helicopter unit over the next several years.
Lockheed Martin Stock is still Cheap
Given that the company projects to sustain healthy revenue and profit growth in the coming years, Lockheed Martin stock remains remarkably cheap.
Shares trade at just 17.5x forward earnings. By contrast, the S&P 500 trades at 19.2x forward earnings.
Sure, some of that discount is warranted because Lockheed Martin is historically a capital expenditure intensive business with lumpy cash flows. But, on the fourth quarter conference call, management sounded a very optimistic tone with regarding how cash flows will pan out over the next few years, supported by healthy top-line growth and an increasingly favorable margin profile.
Consequently, today’s 17.5x forward multiple on Lockheed Martin stock looks more like a bargain than anything else.
So long as shares remain relatively cheap, and the numbers remain relatively strong, then this stock should keep working and keep flying higher.
Bottom Line on LMT Stock
Lockheed Martin stock has been a winner ever since Trump came into office, with shares up 70% since Jan. 1, 2017, compared to a 50% gain for the S&P 500.
This out-performance should persist so long as Trump remains in office, the F-35 and Sikorsky tailwinds remain strong, and the stock remains cheap. Right now, all three of those things are true. So, shares should keep marching higher for the foreseeable future.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
