Lockheed Martin Corp (LMT)

Today's defense market looks quite good as the world is spending more than ever before on military applications. The US still stung from 9/11 will continue to spend on defense no matter the political background as no one wants to look weak on defense such as Al Gore did in President Bush's reelection campaign. Obama was heard saying the he would immediately remove the troops from Iraq, so they could focus their troops on Afghanistan. More importantly, there are fighters and bombers that have new technologies that need to be implemented. The F-16 was just removed service and that was the major fighter bomber in the Air Force. Not to mention the F-15 is looking to be replaced as the main fighter and stealth technology also looks to be in the plans for fighters.





Around the world, countries from emerging markets have tons of cash to spend. Most of the money is funded by national oil programs that are directly turned... More Today's defense market looks quite good as the world is spending more than ever before on military applications. The US still stung from 9/11 will continue to spend on defense no matter the political background as no one wants to look weak on defense such as Al Gore did in President Bush's reelection campaign. Obama was heard saying the he would immediately remove the troops from Iraq, so they could focus their troops on Afghanistan. More importantly, there are fighters and bombers that have new technologies that need to be implemented. The F-16 was just removed service and that was the major fighter bomber in the Air Force. Not to mention the F-15 is looking to be replaced as the main fighter and stealth technology also looks to be in the plans for fighters.





Around the world, countries from emerging markets have tons of cash to spend. Most of the money is funded by national oil programs that are directly turned into defense. Many of these countries are beginning to acquire many of these technologies and will be buying them real soon. They will be purchasing ships, helicopters and the new bomb resistant mobile units. As these are purchased, it matters little what the US economy is doing as defense spending has become more of a need than a luxury.





Lockheed Martin is a very balanced and well run company. Their largest sales are derived from aeronautics at $12.3 billion. Their second highest selling group is electronic systems at $11.2 billion, followed by information systems and global services at $10.2 billion and space systems at $8.2 billion. 58% of their revenues are made up from United State's defense spending, while 27% is from civil and intelligence agencies. 15% of all sales come from international spending.





There is little to show that this spending will be decreased going forward. The US defense and intelligence budget remains strong and homeland security is also making addition purchases to protect the country. International markets have many of the same issues and will continue to grow as well.





LMT looks good going forward on their highly sophisticated space programs. They are leader with respect to global positioning systems. They are currently pursuing a more sophisticated and expensive system for the US Government. They are also working to set up a new military satellite communications system. They also have started in environmental satellites. They have six new aircraft designs in the works and a new joint light tactical vehicle.





Over the last five years, their backlog has been quite high, never below $74 billion and never above $77 billion. 2007 had a slightly higher backlog than usual at $76.7 billion. Operating margins have increased every year since 2002 where it was 7.6%. 2007 ended the year with margins of 11.2%, quite remarkable for this style and size company. Return on invested capital has also been high as in 2002 it was a low 6% and has risen to 21.4% last year. Cash from operations has increased, as 2003 had $1.8 billion and free cash of $1.1 billion. That increased last year to $4.2 billion and $3.3 billion. That is a tripling in free cash flow in just five years. Their stock repurchase plan has continued to increase. $482 million was spent in 2003 and $2.1 billion last year. Over the last five years, $6.7 billion in stock has been repurchased. They still have the authority to buy back another $3.5 billion. They have also tripled the amount given back to investors in the form of dividends over the last five years. Their main goal has been to give back 50% of free cash flow to investors. In most years they did this and then some. They have returned $9 billion to shareholders over the last five years.





Technically the stock looks cheap and has just moved out of its downward moving average. Right now $100 seems to be the bottom for the stock. Also, the forward PE of 12 seems very cheap for a company this well positioned. They have beaten earnings for four quarters in a row by double digits. They have grown over 31% a year for the last five and look to grow by 12% a year for the next five. This estimate looks low as I do believe that they will continually hit near the top end of guidance. This stock looks to have a run in it, you can buy it but sell if it dips below $100.