$LMT

Lockheed Martin Long Thesis

  • I am very new to value investing - if this is even value investing - so bear with me

  • Three points

    • This thing trades at 14x 2020E earnings and 14x 2021E earnings

    • It pays a 3% Dividend

    • It is projecting only about 4% growth despite new recent acquisitions that may spur growth

    • It is managed by Jim Taiclet who took over about 6 months ago after a stellar run at AMT for many years

    • It has structurally 15% EBITDA margins and little debt

    • Business is not re-occuring and capex is high - roughly $1.3B per year given what they are building

    • Market is really dependent on government spending on defense - this has been flattish to down over the last 5 and 10 years after a steady rise to current levels following 9/11 and Iraq/Afghanistan wars

    • The business produces 8% Levered Free Cash Flow and 9% unlevered freecash flow and has 13.4x EBITDA-Capex/Interest Expense ratio

    • The company just acquired

      • Hypersonics are a growth generator for LMT


  • Major risks

  • Thesis

Business Overview

  • Lockheed Martin operates four different business units: Aeronautics (40% of revenue, 32% of Operating Profit), Missiles and Fire Control (MFC) (17%, 18%) , Rotary and Mission Systems (RMS) (25%, 19%) and Space (18%, 13%)

  • To give you a sense of what each of these divisions is actually selling

    • Our Aeronautics business segment includes our largest program, the F-35 Lightning II Joint Strike Fighter, an international multi-role, multi-variant, stealth fighter aircraft. Net sales for the F-35 program represented approximately 28% of our total consolidated net sales for both the quarter and nine months ended September 27, 2020 and 28% and 27% of our total consolidated net sales for the quarter and nine months ended September 29, 2019.

    • MFC’s net sales during the quarter ended September 27, 2020 increased $370 million, or 14%, compared to the same period in 2019. The increase was primarily attributable to higher net sales of approximately $250 million for tactical and strike missile programs due to increased volume (primarily Guided Multiple Launch Rocket System (GMLRS) and High-Mobility Artillery Rocket Systems (HIMARS)); and about $200 million for integrated air and missile defense programs due to increased volume (primarily PAC-3 and THAAD). These increases were partially offset by lower net sales of approximately $60 million for sensors and global sustainment programs due to lower volume on the Apache sensors program; and about $35 million due to the divestiture of the Distributed Energy Solutions business.

    • RMS’ net sales during the quarter ended September 27, 2020 increased $289 million, or 8%, compared to the same period in 2019. Net sales increased approximately $180 million for Sikorsky helicopter programs due to higher volume primarily on production contracts (primarily Seahawk, VH-92A, and CRH); about $55 million for various TLS programs due to higher volume; and about $35 million for IWSS programs due to higher volume primarily on the Aegis partially offset by lower volume on LCS.

    • Space’s net sales during the quarter ended September 27, 2020 increased $163 million, or 6%, compared to the same period in 2019. The increase was primarily attributable to higher net sales of approximately $90 million for government satellite programs due to higher volume (primarily Next Gen OPIR); and about $60 million for strategic and missile defense programs due to higher volume (primarily hypersonic development programs).

    • Space’s operating profit during the quarter ended September 27, 2020 decreased $61 million, or 20%, compared to the same period in 2019. Operating profit decreased approximately $50 million due to lower equity earnings from the corporation's investment in United Launch Alliance (ULA); about $15 million for government satellite programs due to lower risk retirements (primarily Advanced Extremely High Frequency (AEHF)); and about $15 million for strategic and missile defense programs due to lower risk retirements (primarily Fleet Ballistic Missiles).

    • TLDR - Stealth fighter jets, tactial missile and strike programs, helicopters, and satellites/spacecraft

  • The company is mainly a government contractor with 74% of its $48.4B in net sales coming from the U.S. Government for the last nine months end September 2020

    • The rest comes from international sales and an add-back related to unallocated corporate income - i.e. intercompany spend

  • This business is insanely complex