Lockheed Stock: Undervalued with Healthy Dividend Yield

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Lockheed Martin (NYSE:LMT) is one of the possible value picks, currently trading at a price-to-earnings-ratio of 14.1. I am bullish on the stock.

In the last 12 months, the stock has been an underperformer, having declined by 10.4%. The stock, however, seems poised for a reversal. (See LMT stock charts on TipRanks)

Let’s talk about the factors that can serve as upside catalysts for LMT stock.

The Evergreen Defense Sector

In an economic environment that’s characterized by uncertainties, it makes sense to consider exposure to sectors immune from economic shocks. The defense sector falls into this category.

This view is underscored by the fact that global military spending in 2020 was $1,981 billion. Even with the impact of the pandemic, military spending increased by 2.6% on a year-on-year basis.

Further, the United States, China, India, Russia and the United Kingdom accounted for 62% of the total military spending. With all these countries involved in geo-political conflicts, it’s likely that military spending will continue to increase.

It’s also worth noting that most NATO allies have fallen short of their defense spending targets in 2020. Spending is likely to be ramped up as economic concerns wane in the coming years. This provides further growth visibility for defense companies.

Overall, it’s a good time to remain invested in one or several stocks from the defense sector. Lockheed Martin looks like a good pick considering its order book, regional diversification, and fundamentals.

Order Book Provides Growth Visibility

The steady growth in global defense spending is also reflected in the company’s order backlog. In 2018, Lockheed reported a backlog of $130.5 billion. The backlog swelled to a record of $147 billion, as of December 2020.

For 2020, Lockheed reported revenue of $65.4 billion. An order backlog of $147 billion implies revenue visibility of more than two years.

For the current year, the company expects to report an operating cash flow of $8.9 billion. Further, operating cash flow guidance for 2022 and 2023 is $9.0 and $9.1 billion, respectively.

Clearly, Lockheed is positioned to maintain its annualized dividend of $10.4. At the same time, the company has been pursuing share repurchases.

Geographical Diversification to Boost Growth

It’s important to note that in 2020, Lockheed Martin reported that 74% of its sales came from the United States government. International sales accounted for 25% of total revenue.

In January 2021, the UAE signed a deal to purchase 50 F-35 jets from Lockheed. In June 2021, the company also won a $5.5-billion warplane deal from Switzerland.

These contracts show that the company is increasing its international presence. In the coming years, it’s likely that international revenue will trend higher as a percentage of total sales. In particular, growth is likely to be driven by the sale of F-35s to international partner countries.

Lockheed is also well diversified in terms of segments. Its Aeronautics segment remains the revenue driver. However, its Space segment reported double-digit growth in Q2 2021. This segment is a potential game-changer, particularly if hypersonic weapons, and next-generation interceptions gain traction.

Wall Street’s Take

According to TipRanks’ analyst consensus rating, LMT stock comes in as a Moderate Buy, with six Buys, and three Holds assigned in the past three months.

The average Lockheed price target is $423.89 per share, implying 18.7% upside potential from current levels.

Concluding Views

With a robust order backlog, Lockheed Martin seems like a cash flow machine. Growth from international markets is likely to ensure that there is upside in cash flows in the coming years.

The delay related to the planned acquisition of Aerojet Rocketdyne has impacted sentiments to some extent. However, the stock looks attractive, even if the antitrust decision related to the acquisition is negative.

Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article

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