Is Lockheed Martin Still a Safe Investment?

With shares of Lockheed Martin (NYSE:LMT) trading at around $107.05, 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:

C = Catalyst for the Stock’s Movement

Lockheed Martin is the largest defense contractor in the world. This will often act as a positive, but times are changing. United States involvement in Afghanistan is winding down, and the Department of Defense has to cut defense spending by $1 trillion over 10 years.

The value of Department of Defense contracts declined 52 percent (to $19 billion) in April compared to March. Bulls will undoubtedly point to consistent contract wins and stock price appreciation, and this very well may continue, but it can’t be denied that there is more reason for caution now than in the past. Even if longs don’t want to listen to financial writers, they should at least pay attention to the actions of company insiders. Insider selling substantially increased in May. Four different officers sold more than one million shares.

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With defense cuts becoming a reality, Lockheed Martin has taken the cost-cutting route (mostly layoffs). This has the potential to lead to an improved bottom line, but it won’t lead to improved top-line performance. There are two ways to look at this. On the positive side, an improved bottom line will likely lead to maintained or increased capital to shareholders. On the negative side, declining revenue could lead to reduced guidance in the future and spook investors.

Revenue has steadily increased on an annual basis but declined on a year-over-year and sequential basis last quarter. That being the case, there is no way to put a positive spin on the revenue situation. On the other hand, earnings improved on a year-over-year and sequential basis.

Due to defense spending cuts, Lockheed Martin and Northrop Grumman (NYSE:NOC) now have relatively high short positions of 3.10 percent and 4.40 percent, respectively. Boeing (NYSE:BA), on the other hand, only has a short position of 1.10 percent as it doesn’t rely as much on defense spending. However, dividend investors will be more attracted to Lockheed Martin and Northrop Grumman. Lockheed Martin currently yields 4.30 percent, and Northrop Grumman currently yields 2.90 percent. Boeing currently yields 1.90 percent.

LMT BA NOC
Trailing P/E 12.36 18.94 10.49
Forward P/E 11.89 13.99 10.91
Profit Margin 6.04% 5.03% 7.81%
ROE 302.40% 64.43% 19.60%
Operating Cash Flow 3.19B 7.20B 2.75B
Dividend Yield 4.30% 1.90% 2.90%
Short Position 3.10% 1.10% 4.40%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

Lockheed Martin has underperformed its peers for every time frame listed below, but it has still been a strong performer over the past three years, and as mentioned earlier, it offers the highest yield of the three companies mentioned in this article.

1 Month Year-To-Date 1 Year 3 Year
LMT 6.15% 18.81% 34.63% 55.19%
BA 7.05% 35.42% 42.32% 65.76%
NOC 6.81% 24.20% 42.40% 69.01%

At $107.05, Lockheed Martin is trading above its averages.

50-Day SMA 103.75
200-Day SMA 94.92
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E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Lockheed Martin is stronger than the industry average of 0.70.

Debt-To-Equity Cash Long-Term Debt
LMT 0.02 3.06B 6.30B
BA 1.21 11.81B 9.17B
NOC 0.42 3.18B 3.94B

E = Earnings Have Been Impressive

Earnings have seen some ups and downs over the past several years, but enormous profits have been commonplace. Lockheed Martin even managed to deliver big profits in 2008 and 2009, which was extremely rare.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 42,731 45,189 45,803 46,499 47,182
Diluted EPS ($) 7.86 7.78 7.94 7.81 8.36

Looking at the last quarter on a year-over-year basis, revenue declined 2 percent, and earnings improved 13.90 percent.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 11,293 11,921 11,869 12,099 11,070
Diluted EPS ($) 2.03 2.38 2.21 1.73 2.33

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Despite many headwinds, Lockheed Martin is still enjoying upward stock price momentum. It has also performed well in a weak market over the past several days. As always, the trend is your friend. And this isn’t like owning a high-growth tech stock trading at 1,800 times earnings. Rather, Lockheed Martin is trading at just 12 times earnings. Therefore, if the market heads south, Lockheed Martin won’t head south as fast as many other stocks throughout the broader market. There should be ample time for an exit.

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For those concerned about defense spending cuts yet still want to be in the space, Boeing should be considered. The demand for Boeing products is through the roof. You can type in the ticker BA in the window above to find articles offering more information.

As far as Lockheed Martin goes, it’s an OUTPERFORM, but based on current circumstances, a set-it-and-forget-it approach isn’t recommended.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.