Lockheed Martin Corp (LMT, Financial) saw a daily change of -1.47%, and a 3-month gain of 1.03%, with an Earnings Per Share (EPS) (EPS) of 27.35 as of August 29, 2023. The question on the minds of investors is, "Is the stock fairly valued?" In this article, we will conduct a comprehensive valuation analysis to answer this question. Read on to gain insightful knowledge about Lockheed Martin's financial health and prospects.
About Lockheed Martin Corp (LMT, Financial)
Lockheed Martin is the world's largest defense contractor, dominating the Western market for high-end fighter aircraft since it won the F-35 Joint Strike Fighter program in 2001. The company's largest segment, aeronautics, generates over two-thirds of its revenue from the F-35. The remaining segments include the rotary and mission systems (mainly the Sikorsky helicopter business), missiles and fire control (missiles and missile defense systems), and space systems (satellites and equity income from the United Launch Alliance joint venture).
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock, derived from our unique valuation method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at, considering historical multiples, a GuruFocus adjustment factor based on the company's past returns and growth, and future business performance estimates. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Our analysis indicates that Lockheed Martin (LMT, Financial) appears to be fairly valued. The stock's fair value, as estimated by the GF Value, is based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns. At its current price of $445.65 per share, Lockheed Martin has a market cap of $112.20 billion, and the stock seems to be fairly valued.
Since Lockheed Martin is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Link: These companies may deliver higher future returns at reduced risk.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to carefully review a company's financial strength before deciding to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Lockheed Martin has a cash-to-debt ratio of 0.21, which ranks worse than 70.93% of 289 companies in the Aerospace & Defense industry. Based on this, GuruFocus ranks Lockheed Martin's financial strength as 6 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. Lockheed Martin has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $67.40 billion and Earnings Per Share (EPS) of $27.35. Its operating margin is 12.86%, which ranks better than 78.09% of 283 companies in the Aerospace & Defense industry. Overall, GuruFocus ranks the profitability of Lockheed Martin at 9 out of 10, which indicates strong profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Lockheed Martin is 5.8%, which ranks better than 62.84% of 261 companies in the Aerospace & Defense industry. The 3-year average EBITDA growth is 0.9%, which ranks worse than 50.66% of 227 companies in the Aerospace & Defense industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Lockheed Martin's ROIC was 16.26, while its WACC came in at 6.04.
Conclusion
In conclusion, the stock of Lockheed Martin (LMT, Financial) appears to be fairly valued. The company's financial condition is fair, and its profitability is strong. Its growth ranks worse than 50.66% of 227 companies in the Aerospace & Defense industry. To learn more about Lockheed Martin stock, you can check out its 30-Year Financials here.
To find out the high-quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
