Lockheed Martin: Global Conflict Escalation Presents An Oppurtunity

A) Introduction

With the news of Boko Haram and ISIS joining forces on Friday and the increasing calls for more US troops on the ground in Iraq, it is clear that the war in the Middle East is escalating. In this report, we'll be outlining why we maintain an "Outperform" rating on Lockheed Martin (NYSE:LMT), the defense contractor. Besides being a clear beneficiary from the escalation in the Middle East and Ukraine conflicts, we believe Lockheed Martin has a very strong growth profile at a value that isn't yet too expensive. Lockheed has also been demolishing analyst estimates recently, which is a trend that we believe will continue.

We will begin by breaking down the company's relative value, then we'll analyze its growth profile, how it has performed versus analyst expectations, and conclude with a qualitative discussion of potential catalysts and risks. We should note that we base our quantitative analysis purely off of academic research, thus restricting our analysis to metrics that have been empirically shown to predict stock returns. For a detailed breakdown of prominent academics and the insights revealed from their research, click here.

B) Valuation Breakdown

We start with a breakdown of relative valuation, as valuation metrics have been repeatedly shown to be some of the best predictive indicators. There is a reason that most of the best investors tend to be value investors. Over the long-term, cheap stocks beat expensive stocks. The following breakdown shows Lockheed Martin's valuation profile, looking at five traditional value metrics that have strong predictive ability:

Source: QuantifiedAlpha.com/stockData/LMT#value

Lockheed falls roughly in line with the Aerospace and Defense industry group averages, except for on a book value basis. Lockheed is currently trading at 18.5 times book value, which is wildly higher than the industry group (2.53), industrial sector (2.62), and overall market (2.48) averages. Our algorithms take into account each metric, so the company's extremely high price-book ratio hurts its value rank. With that being said, it should be noted that Lockheed Martin has a history of trading at an extremely high price/book ratio. This ratio is significantly down from it's high of 790x book in January 2013, which has been trending downwards ever since. From a revenue and earnings basis, Lockheed looks attractively priced with both its sales yield (72.5%) and earnings yield (5.6%) being higher than the overall market averages (50.3% & 4.7%). Lockheed also offers a solid dividend yield (3%), which is double the industrial sector average (1.5%). Overall, we rate Lockheed as "Slightly Overvalued" but don't expect it to materially hurt the stock's performance versus the S&P 500 over the next twelve months.

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Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in LMT over the next 72 hours. The author wrote this article themselves, and it expresses their ...

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