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Why Lockheed Martin Corporation (LMT) Stock Will Gain Traction Soon

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Global defense giant Lockheed Martin Corporation (NYSE:LMT) just reported blowout quarterly numbers, but the stock didn’t really move. LMT stock inched just over 1% higher the day after the report, but it started giving up some of those gains. All in all, Lockheed Martin is acting like a stock that is just maxed out.

Why Lockheed Martin Corporation (LMT) Stock Will Gain Traction Soon
Why Lockheed Martin Corporation (LMT) Stock Will Gain Traction Soon

Source: Shutterstock

After all, LMT stock is up 15% year-to-date and 20% since Trump got elected in November 2016.

Is it time to fade that rally?

If you’re a short-term trader, maybe. There really isn’t anything on the near-term horizon that will act as a major catalyst for Lockheed Martin. The company continues to report contract wins, and yet investors aren’t really impressed. So maybe it is a good time to profit-take because gains in the near-term might be capped by already fully loaded expectations.

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But if you’re an investor or geared for longer-term gains, then you should stick with LMT.

Here’s why.

Lockheed Martin Wins When Defense Spending Rises

When U.S. defense spending rises, LMT stock wins. And that is the dynamic that will likely play out over the next several years.

Trump is a big defense and military guy. He has consistently reiterated that he wants to up the defense budget by a pretty substantial margin. Trump’s request for the Fiscal 2018 Department of Defense (DOD) budget included $574 billion for the base budget. That’s a 10% year-over-year increase from the Fiscal 2017 appropriations.

That’s a big increase, but both the House and Senate Armed Services Committees exceeded Trump’s request in their Fiscal 2018 National Defense Authorization Act markups. Just a few days ago, the Republican-led House approved a bill which authorized a $696 billion defense spending bill for 2018.

That number is so big that it exceeds current budget caps. Materialization of the proposed $696 billion defense spending bill will rely on Congress lifting those budget caps.

Global dynamics imply that Congress will do just that. North Korea’s ballistic missile tests coupled with Trump threats of isolationism continue to escalate geopolitical tensions. These rising geopolitical tensions are forcing everyone, not just the U.S., to start increasing military and defense spend. Seoul is increasing military spending to 2.9% of GDP, the largest increase in Seoul’s defense budget as a percentage of GDP since the 1980s. Meanwhile, Europe and Canada are set to increase 2017 defense spending at the fastest pace in 3 years.

Its a global dynamic. Everyone is raising defense spending as geopolitical tensions rise. Its a tide that will lift all boats, the U.S. included.

That’s huge for Lockheed Martin, and it implies multiple years of strong growth ahead.

Bottom Line on LMT Stock

Overall, the financial picture for LMT stock is favorable.

There is some leverage on the balance sheet, but it’s not bad relative to the market cap. Overall, debt really isn’t an issue. Meanwhile, Lockheed Martin stock has a good dividend yield in excess of 2.5%. Cash flows are also healthy (the operating cash flow rate has hovered around 10% to 13% over the past several years).

The big cash flow rate is accompanied by a relatively subdued capex rate. That means there is lots of free cash flow to go around. The trailing free cash flow yield is about 4.8%, and that’s pretty good for a secular growth company like LMT.

The valuation is somewhat stretched. Lockheed Martin stock trades north of 20-times next year’s consensus earnings-per-share estimate, but growth over the next 5 years is pegged at a mere 6% per year. But the market has always paid a premium for LMT stock, likely due to its secular growth nature. We are tempered by valuation, but do not think its unwarranted.

All in all, LMT is a sound company with attractive financial aspects and a reasonable valuation.

Its not cheap, but there is growth to warrant the premium valuation. Lockheed Martin stock should continue to grind higher as defense spending rises with geopolitical tensions.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

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