Lockheed Martin SWOT Report


Summary

  • Lockheed Martin remains a key defense contractor for the U.S. and their allies.
  • The growing backlog will be converted into revenue over the next 2 years and beyond.
  • Lockheed is poised for growth as their expertise is sought out for their advancing technology.

Margin of Safety Investing

Lockheed Martin (LMT) operates as the largest global aerospace and defense/security company. Ongoing national security threats for countries with a lot to protect (the U.S. and their allies) has the potential to provide Lockheed with a growing source of revenue for many years. Lockheed Martin handles everything from research, designing, developing, engineering, manufacturing, installation, and ongoing support for their products/systems. 

The company operates the following four segments:

The Aeronautics segment is the largest segment, which comprises 40% of total revenue. Sales from this segment are primarily from the U.S. Navy and Air Force, along with other government agencies and other countries. This segment provides the following military aircraft: F-35 stealth fighter, C-130 Hercules airlifter, and the F-16 and F-22 fighter jets. 

The Rotary and Mission Systems [RMS] segment comprises 26% of total revenue. The RMS segment produces the Black Hawk, Sea Hawk, and other helicopters; the LCS ship; the Aegis Combat System; the Advanced Hawkeye Radar System; and the Command, Control, Battle Management, and Communications contract. 

The Space segment comprises 18% of Lockheed’s total revenue. This segment produces satellites, space transportation systems, and other defense systems. The Space segment provides situation awareness that allows customers to gather and analyze critical intelligence data. 

The Missiles and Fire Control [MFC] segment comprises 16% of the company’s total revenue. MFC provides tactical missiles, air-to-ground precision strike weapons, air & missile defense systems, logistics, mission operations support, fire control systems, engineering support, and more. 

source: Lockheed Martin Q4 2018 slideshow

Strengths

Lockheed Martin has multiple strengths that can drive strong long-term performance.

  • The largest direct driver for Lockheed’s revenue is the company’s growing backlog of $133.5 billion. This increased 27% in Q1 2019 as compared to Q1 2018. Lockheed expects to recognize 37% of the backlog over the next year and 65% over the next 2 years. 
  • The company achieves a high ROIC of 32%. So, Lockheed gets a good return for their invested dollars. This demonstrates strong management effectiveness at Lockheed.
  • Strong product porfolio: Lockheed offers a wide variety of defense-related products and services. This gives the company diverse sources of revenue. 
  • Lockheed has a high level of technological expertise. The company’s products require strong engineering knowledge and skills. 
  • Intellectual property: The company has an extensive collection of patents, trademarks, copyrights, and trade secrets. This protects their developments and helps contribute to growing and maintaining market share.
  • More total assets than total liabilities for shareholders equity of $2.5 billion. 
  • Consistently produces free cash flow: About $4 billion in FCF for the past twelve months ending on March 31, 2019. 

source: Lockheed Martin Q4 2018 slideshow

Weaknesses

Although Lockheed Martin has many strengths, there are some weaknesses that investors should be aware of.

  • A high percentage of net sales (about 70%) are derived from the U.S. Government. 
  • The F-35 program comprised about 27% of the company’s net sales (based on 2018 data). Reductions in contracts for the F-35 could have a significant affect on revenue. 
  • Lockheed Martin’s gross margin of 14% lags the sector median of 28.6%. For context, LMT’s main competitors have higher gross margins: Raytheon (RTN) 27.6%, Northrup Grumman (NOC) 22%, General Dynamics (GD) 17.9%, Boeing (BA) 19%. 
  • High amount of total debt of $13.9 billion as compared to $991 million in total cash. 

Opportunities

While Lockheed Martin is well established, there are still some opportunities for future growth. 

  • One growth opportunity that has been working for the company is international growth. The F-35 program is expected to drive international growth. Fifty percent of all F-35 orders are expected to come from international customers over the next 5 years. 
  • Growth in existing domestic markets can also fuel overall revenue growth, but probably to a lesser degree than international growth.
  • Strategic acquisitions remain another long-term growth opportunity. The company acquired Sikorsky a few years ago to add a new line of helicopters to the product portfolio. More strategic acquisitions could take place in the future for continued growth.
  • Implementing artificial intelligence represents an opportunity for Lockheed Martin.  AI technology can be used to stop an attack by identifying unusual behavior. The company pointed out that combining human expertise and AI systems is better than human or machines by themselves. 
  • Improving the technology of existing products can help fuel growth. Existing products could have more advanced engineering applied which could spark new business for replacements or upgrades. 

Threats

There are a few external threats that could negatively impact Lockheed Martin.

  • Since the company derives most of their business from the U.S. Government, reductions in domestic defense spending could have a significant negative affect on the company’s revenue. 
  • Changes in government regulations could have a negative impact on Lockheed’s revenue or earnings. Certain regulations could make doing business more expensive, thus reducing profitability. 
  • International competitors could arise with similar technology. For example, China, Russia, and Europe could advance their technologies and take market share away from the company.
  • Current customers could develop their own defense products/programs over the long-term, which could eat into Lockheed’s market share. 
  • Increased competition or better technology from Raytheon, Northrup Grumman, General Dynamics, and Boeing could take market share away from Lockheed. Boeing’s Super Hornet could be a threat for the F-35. 

Long-Term Lockheed Martin Outlook

Ultimately, Lockheed’s growing backlog is what will drive growth over the next two to five years. The backlog gets converted into revenue. Most of the current backlog will be recognized over the next 2 years with 35% of it being recognized after 2 years. Investors should keep an eye on how the backlog grows going forward.

Although Lockheed’s gross margin is lower than their competitors, the company prices its products/services to sell. The company still achieves respectable profitability and cash flow with this strategy as the backlog continues to grow. 

Ongoing foreign threats increase the likelihood of defense spending remaining strong for the foreseeable future. However, this is not a guarantee. Lockheed Martin’s business will depend on continued strong defense spending from the U.S. and other countries.  

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The article is for informational purposes only (not a solicitation to buy or sell stocks). David is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.