- Lockheed Martin beat low expectation on the revenue and EPS front.
- Lockheed Martin understands the importance of generating cash.
- Investors should eye Lockheed Martin’s long-term debt levels.
On April 26, aerospace defense company Lockheed Martin (NYSE:LMT) reported its Q1 FY 2016 earnings. Lockheed Martin beat lowered expectations, both on the revenue and earnings per share (EPS) fronts. Lockheed Martin’s revenue came in at $11.7 billion beating estimates of $11.09 billion by 6%. The company’s earnings per share came in at $2.58, representing a 3% increase over the consensus estimate of $2.51, according to Zacks. On the following day, Wall Street met the news with some enthusiasm and bid up the shares by 0.6%. All in all, the company did ok for the quarter.
Showing The Cash
One of the things that impressed me, while reading Lockheed Martin’s earnings slides and call, is the management’s attitude towards cash flow. Almost immediately, Lockheed Martin’s management began discussing its operating cash flow. Of course, this may represent an effort to accentuate the positive (net income declined). However, this is refreshing to the long-term business oriented investor, especially those owning shares in a complicated business such as aerospace defense. Security of its clients may compel company management to hold back on revealing too much about company strategy. However, being upfront about its cash flow tells the investing community that it’s committed to shareholder total return.
Operating cash flow and free cash flow increased 63% and 68%, respectively, YoY. Company management touted the fact that only 73% of its free cash flow was spent on capital return initiatives, such as dividends and share repurchases. Only 38% of its quarterly free cash flow was spent on dividend payments. Currently, Lockheed Martin pays its shareholders $6.60 per share per year and yields 2.9% annually. On its balance sheet, Lockheed Martin saw its cash balance increase 33% since the start of the year, which represents an impressive 46% of its stockholder’s equity.
Other fundamental measures
Lockheed Martin expanded its revenue by 16% YoY while its net income declined 10% due in part to special items pertaining to severance charges. Lockheed Martin’s balance sheet may leave some conservative investors concerned. Lockheed Martin’s long-term debt stands at 451% of stockholder’s equity, which is high even in this historically low-interest rate environment. The times interest earned has declined and now stand at 8x versus 15x at the start of the year. I’m ok with this as long as it remains above five. Investors should eye this carefully.
Energy softness concerns
There are plenty of concerns over Lockheed Martin’s Sikorsky helicopter unit. In the earnings call, management assured investors that the navy showed interest in the CH-53K helicopter. Also, analysts were worried about the negative impact of low oil and gas prices on the demand for employee transport helicopters in that sector. Management provided reassurances that they plan to diversify into other market niches such as VIP transportation, international military segments and search and rescue. Moreover, oil prices may leave the budgets of some clients constrained, according to the earnings call, and may put a medium term dampener on the company’s business. However, the company management assured shareholders that security concerns may take precedent.
Overall, Lockheed Martin’s management feels upbeat about its FY 2016. They upped the guidance on all of the important metrics, including revenue, operating profit, EPS and last but not the least—operating cash flow. Increased defense spending from the U.S. government probably helped this sentiment along. Lockheed Martin is undervalued compared to the market as a whole, trading at a P/E ratio of 20 versus 24 for the S&P 500. This company definitely deserves more of your research time.