Is Lockheed Martin a Good Portfolio Play?

With shares of Lockheed Martin (NYSE:LMT) trading around $160, is LMT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Lockheed Martin is a global security and aerospace company principally engaged in the research, design, development, manufacture, integration, and sustainment of technology systems and products. The company also provides a range of management, engineering, technical, scientific, logistic, and information services. It serves both domestic and international customers with products and services that have defense, civil, and commercial applications with its principal customers being agencies of the U.S. government. It operates in five business segments: Aeronautics, Information Systems & Global Solutions, Missiles and Fire Control, Mission Systems and Training, and Space Systems.

Lockheed Martin, the Pentagon’s biggest defense supplier, said it will move existing employees to a defined-contribution retirement plan by January 1, 2020, becoming the latest company to freeze its expensive defined-benefit pension plan. The new pension plan will come into effect January 1, 2016, the maker of the F-35 fighter jet, satellites, and coastal warships said Tuesday. “This action also allows us to better manage the rising costs of our retirement programs at a more predictable rate and to limit our long-term liabilities,” a Lockheed Martin spokesperson told Reuters.

T = Technicals on the Stock Chart Are Mixed

Lockheed Martin stock has been moving higher over the past couple of years. However, the stock is currently pulling back and may need time to consolidate before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Lockheed Martin is trading between its rising key averages, which signals neutral price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Lockheed Martin options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Lockheed Martin options

18.76%

96%

94%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Average

Average

September Options

Average

Average

As of Tuesday, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Lockheed Martin’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Lockheed Martin look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

23.18%

-13.82%

20.36%

10.92%

Revenue Growth (Y-O-Y)

-3.79%

-4.71%

-4.38%

-4.3%

Earnings Reaction

-2.97%

-3.93%

3.79%

1.96%

Lockheed Martin has seen rising earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been optimistic about Lockheed Martin’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Lockheed Martin stock done relative to its peers – Boeing (NYSE:BA), Northrop Grumman (NYSE:NOC), and Raytheon (NYSE:RTN) — and sector?

Lockheed Martin

Boeing

Northrop Grumman

Raytheon

Sector

Year-to-Date Return

8.46%

-6.18%

5.45%

2.89%

3.65%

Lockheed Martin has been a relative performance leader, year-to-date.

Conclusion

Lockheed Martin provides valuable and essential security and aerospace technology to several companies and the governments worldwide. The company said it will move existing employees to a defined-contribution retirement plan by January 1, 2020. The stock has been moving higher in recent years but is currently pulling back. Over the last four quarters, earnings have been on the rise while revenues have been decreasing. However, investors have remained optimistic. Relative to its peers and sector, Lockheed Martin has been a year-to-date performance leader. WAIT AND SEE what Lockheed Martin does the rest of this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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