The war between Ukraine and Russia and the tensions over Taiwan have enhanced the focus of many countries on their defense spending. The demand for American-made artillery, firearms, aircraft, explosives, and vehicles has surged significantly.
Julia Gledhill, an analyst at the Center for Defense Information at the Project On Government Oversight, said, “Next year’s national security budget will likely be nearly a trillion and a half dollars.”
President Biden signed off a $29 billion increase in defense spending for fiscal 2022, taking the national defense total in the 2022 omnibus spending bill to $782 billion, indicating a 3.9% increase over the 2021 appropriations. According to the Aerospace & Defense Global Market Report 2022, the A&D (Aerospace & Defense) market is expected to grow at a CAGR of 8.5% to reach $1.05 trillion in 2026.
Despite the favorable industry backdrop, aerospace and defense major The Boeing Company’s (BA) third-quarter EPS and revenue estimates came below analyst estimates. Analysts were expecting an EPS of $0.07, but the company reported a loss per share of $6.18. Also, its revenue of $15.9 billion was 10.9% below the consensus estimate.
For the fiscal third quarter ended September 30, 2022, BA’s total revenues increased 4.4% year-over-year to $15.95 billion. Its non-GAAP core operating loss came in at $3.07 billion, compared to non-GAAP core operating earnings of $59 million in the year-ago period. In addition, its non-GAAP core loss per share widened 930% year-over-year.
BA’s stock has declined 14.2% in price year-to-date and 23.5% over the past year to close the last trading session at $172.69. Analysts expect BA’s EPS for fiscal 2022 to remain negative.
Thus, investors should instead consider the leading security and aerospace company Lockheed Martin Corporation (LMT). The company beat the consensus EPS estimate by 2.3% in the third quarter. However, its revenue was 0.6% below analyst estimates.
The company has been in the news this month as NASA’s Artemis I mission with the LMT-built Orion spacecraft on top launched to the moon and ushered in a new era of human deep space exploration. The test flight is amongst the first in a series of missions under the Artemis program, which will result in the first woman and first person of color landing on the moon.
The Bethesda, Maryland, based company’s executive VP Robert Lightfoot said, “Through a nationwide industry team that has also leveraged an international industrial base, this launch and mission unite the skills of a dedicated workforce and innovative technologies to make a global impact.”
Last month, the company was awarded a contract for M299 Launchers with a total value of $25.90 million by the U.S. army. LMT expects its fiscal 2022 revenues to be $65.25 billion, while its EPS is expected to be $21.55. In addition, it expects a free cash flow of higher than or equal to $6 billion.
LMT’s stock has outperformed BA, gaining 31.2% in price year-to-date and 37% over the past year to close the last trading session at $466.24. Over the last three years, LMT’s dividend payouts have grown at an 8.4% CAGR. Its four-year average dividend yield is 2.62%, and its current dividend translates to a 2.57% yield.
Moreover, last month, the company authorized an additional share repurchase of $14 billion. The company expects to complete $4 billion of share repurchases by the end of this year, bringing the total share repurchases to $8 billion. The rest of the repurchases are expected to be completed over three years.
Here’s what could influence LMT’s performance in the upcoming months:
Strong Management Commentary
LMT President and CEO James Taiclet said, “Our continuing ability to deliver strong financial performance, in turn, enables further investments in the 21st Century Security technologies essential to support our customers in conducting effective Joint All-Domain Operations. These technologies include hypersonics, directed energy, and autonomy, as well as cutting-edge digital capabilities in our evolving 5G.MIL open standards-based architecture.”
“In addition, we are investing in production and sustainment capacity for the solutions needed now to defend our allies and our nation, including F-35, Javelin, and HIMARS,” he added.
Robust Financials
LMT’s net sales increased 3.5% year-over-year to $16.58 billion for the third quarter ended September 25, 2022. The company’s adjusted EPS came in at $6.87, representing an increase of 4.1% year-over-year. Its adjusted net income came in at $1.82 billion.
Also, its free cash flow increased 68.3% year-over-year to $2.72 billion. For nine months ended September 25, 2022, LMT’s net cash provided by operating activities increased 18.6% year-over-year to $5.87 billion.
Mixed Analysts Estimates
LMT’s EPS and revenue for fiscal 2022 are expected to decline 2.1% and 2.7% year-over-year to $26.90 and $65.26 billion, respectively. On the other hand, its EPS and revenue for fiscal 2023 are expected to increase 0.9% and 0.8% year-over-year to $27.14 and $65.76 billion, respectively. It has surpassed Street EPS estimates in three of the trailing four quarters.
High Profitability
In terms of the trailing-12-month net income margin, LMT’s 9.07% is 34.2% higher than the 6.76% industry average. Likewise, its 8.84% trailing-12-month levered FCF margin is 159.2% higher than the industry average of 3.41%. Furthermore, the stock’s 1.25% trailing-12-month asset turnover ratio is 55.8% higher than the industry average of 0.80%.
POWR Ratings Show Promise
LMT has an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. LMT has a B grade for Quality, in sync with its high profitability.
It has a C grade for Sentiment, consistent with its mixed analyst estimates.
LMT is ranked #4 out of 74 stocks in the Air/Defense Services industry. Click here to access LMT’s Growth, Value, Momentum, and Stability.
Bottom Line
LMT’s stock is trading above its 50-day and 200-day moving averages of $435.19 and $430.11, respectively, indicating an uptrend. Investors should opt for LMT instead of BA as the company has a strong order book and has guided for a solid end to fiscal 2022. The company is expected to capitalize on the rising defense spending.
How Does Lockheed Martin Corporation (LMT) Stack up Against Its Peers?
LMT has an overall POWR Rating of B, equating to a Buy rating. Check out these other stocks within the Air/Defense Services industry with an A (Strong Buy) or B (Buy) rating: Textron Inc. (TXT), General Dynamics Corporation (GD), and Willis Lease Finance Corporation (WLFC).
LMT shares were unchanged in premarket trading Thursday. Year-to-date, LMT has gained 33.79%, versus a -16.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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