Key takeaways:
Current Price: $ Price Target: $469 (NEW)
Position Size: 4.12% 1-year Performance: +50%
Lockheed released its 4Q19 earnings results this morning, with organic sales +10%, segment operating margins +70bps, and EPS +20.5%. During the quarter, the company made an additional $1B contribution to its pension plan. While not pre-announced, this payment is not surprising as the company has performed well and generated good cash flows recently. This additional contribution will most likely reduce future pension payments needed, a good thing for 2020 and 2021 cash flows. The Sikorsky business helped its segment margins, and the F-35 program continues to lift profits with an 18% incremental margin. LMT has achieved a record backlog level of $144B (from $75B in 2014), up 5% from last quarter. Book-to-bill ended 2019 at 1.2x, a good metric for predicting future demand. Net debt/EBITDA is low at 1.1x. With its solid balance sheet and plenty of cash available, LMT is considering retiring an additional $2B in debt in the next 2 years, as well as increasing its share repurchase. The management team added that they recognize that ½ of its shareholder base is invested in the stock for its dividend, so they are looking into increasing its dividend as well. M&A is less a priority as its organic growth is strong and valuations are high. While LMT’s valuation is pretty full right now, we think the dividend story and very sustainable FCF will keep LMT trading at a premium in the foreseeable future.
2020 guidance was raised:
Sales of $62.75B-$64.25B (increased +2.4% from prior guidance)
Mid-point segment margin 10.8%
EPS of $23.65-$23.95
CFO at or above $7.6B (previous expectations were for ~$7.2B)
As the company provides its guidance, it is interesting to know that over the last few years, the company beat its initial sales guidance by 4% and EPS by 10%.
We are updating our price target as we are rolling the model forward.
LMT Thesis:
· Lockheed Martin is a primary beneficiary from the replacement cycle for aging military aircraft and ships
· Excellent management team focused on returning capital to shareholders
· Strong cash flow and financial position
[tag LMT] $LMT.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109