Editor’s Note |
It’s Friday. Time to give you a stock pick from our sister newsletter, The Spill, so you can think about it over the weekend and maybe make a move Monday morning. While The Juice helps you be better with money across the board, The Spill focuses on stocks financial pros are researching and judges how good of buys they are. If you’re already sold, you can sign up for The Spill – for free – here. |
|
Proprietary Data Insights Financial Pros’ Top Defense Stock Searches in the Last Month
|
|||||||||||||||||||||
The Top Defense Stock According to Experts |
|
As we roll towards another government shutdown, it might seem odd to advocate for a defense stock like Lockheed Martin (LMT). Yet, it’s one of the most consistently searched stocks by asset managers, with more than $1 billion under management, according to our Trackstar data. So, if they’re looking at it, there’s got to be a good reason. We’ve always been big fans of the company and its excellent management. With several headwinds facing LMT, we’ll tell you precisely when we expect the stock to bottom and why. Lockheed Martin’s Business Nestled in North Bethesda, Maryland, Lockheed Martin—the global security and aerospace juggernaut and $ 105.15-billion-cap mammoth is a trailblazer in everything from hypersonics and AI to space exploration. Unrivaled in its knack for tackling complex national security challenges, Lockheed is where innovation and global peace shake hands. Look under Lockheed’s hood and you’ll find an intricate machine of research, development, manufacturing, and more. Clients? Think the U.S. Department of Defense and allied governments across the globe. What sets Lockheed apart are its four powerhouse business segments, each a unique revenue driver pulsing with cutting-edge technology:
Source: Lockheed Marting Investor Relations Recently, Lockheed reported a Q2 2023 revenue of $16.7 billion, marking an 8% YoY increase, shattering expectations. Not only did they report stellar net earnings of $1.7 billion, but their backlog is a record-breaking $158 billion. Financials
Source: Stock Analysis Lockheed has seen revenues stagnate in the last few years as Covid crushed supply chains, making it difficult to meet its backlog (Boeing faces a similar challenge). Heavier competition alongside changing spending priorities meant the company lost quite a few bids in the last few years. Nonetheless, management’s done a fine job keeping profit and free cash flow margins high despite a drop in gross margins. The company’s seen net debt rise from $8.1 billion in 2021 to $13.9 billion. However, that money was used to repurchase over $12 billion in shares while paying out $3 billion in dividends annually. Yet, interest expenses stayed relatively flat. Valuation
Source: Seeking Alpha Although LMT trades near all-time highs, it’s stock is fairly valued. Compared to its peers, only Textron (TXT) trades at anything close to LMT on a price-to-earnings ratio or price-to-cash flow basis. The same is true of other larger competitors like Raytheon (RTX) and Northrop Grumman (NOC) Growth
Source: Seeking Alpha LMT’s biggest challenge we see is revenue growth. While it’s kept up for the last few years, its forward outlook is abysmal. Yet, competitors like AeroVironment (AVAV) and Heico (HEI) expect double-digit growth in 2023. Even TXT and BWX Technologies (BWXT) forecast revenue growth over 5% this year. Profitability
Source: Seeking Alpha Lockheed runs one of the worst gross margins of the group. However, unlike several of its peers, it’s more than capable of turning that into profits and cash flow. Our Opinion 8/10 We believe LMT’s stock will continue to pull back over the next year. Government shutdowns, uncertain defense budgets, and general cost pressures will all place a heavy toll on the company’s top and bottom lines. However, we see that bottoming in 2024, which is where we’d want to step in. But if you’re so inclined, with an almost 3% dividend yield and massive share buyback program, you can’t go wrong dipping your toes in here. |
|
News & Insights |
Freshly Squeezed |
|
Want to get content like this directly to your inbox? Then we urge you to sign up for our newsletter here |