Lockheed Martin Investors Shouldn’t Sweat Over Its Q1 2016 Earnings

  • Wall Street estimates Lockheed Martin’s earnings per share at $2.60 for its Q1 FY 2016.
  • Increased defense budget in the United States bodes well for Lockheed Martin over the next four years.
  • Lockheed Martin provides a service essential to society—security.

On April 26, aerospace defense company Lockheed Martin Corporation (NYSE:LMT) will report its Q1 FY 2016 earnings. Average analysts’ top-line estimate comes in at $11.36 billion representing a 12.4% YoY increase. Average consensus clocks in at $2.60 for earnings per share (EPS), representing a YoY decrease of 5%. Lockheed Martin shouldn’t face any difficulty in meeting these estimates. Things are looking up for Lockheed Martin’s business and stock in the short term as well as the long-term.

U.S. Government Opens Its Wallet

As of this writing, analysts are getting more upbeat on Lockheed Martin stock. The average EPS estimate represents an 1% increase over the previous week. Three analysts upped their estimates in the past 30 days, according to the Thomson Financial Network.

Wall Street optimism probably stems from Lockheed Martin’s history of beating EPS estimates in FY 2015. Also, macroeconomic factors currently favor the company, such as a higher than expected U.S. defense budget for FY 2016. The Department of Defense expects a 2% per annum increase in spending through 2020, according to fellow Amigobulls writer Arie Goren. Moreover, the company continually gets awarded sales contracts for its products.

However, not everything is rosy for the company. Lockheed Martin’s management warned that the recently acquired Sikorsky helicopter unit may perform poorly and may bring down the company’s consolidated results. This partially explains an estimated EPS decline. Low oil prices compel oil companies not to purchase employee transport helicopters.

Wide Moat Appeal

Low oil prices will most likely remain a short-term issue for Lockheed Martin. The company operates in the “aerospace defense” industry. Lockheed’s primary mission is security for its government clients. It sells fighter planes, missiles, and spaceships, as well as the know-how and technology that go along with them. Interestingly, it sells these things abroad as well with 21% of its FY 2015 revenue coming from international sources.

In an unsafe world, security provided by defensive and offensive means represents a necessary evil. As an interesting corollary, its secondary mission of science and exploration can lead to technologies that serve its primary mission. In FY 2015, Lockheed Martin spent $839 million on “independent research and development”. Publicly traded businesses that sell needed products, such as the means of defending a nation in a dangerous world, can serve the investor well over the long term.

Other fundamental factors

Lockheed Martin ended FY 2015 on a decent note. Its revenue and free cash flow increased 1% and 38%, respectively, YoY. Lockheed Martin’s net income showed a slight contraction of 0.2% YoY. In next week’s earnings call, investors should eye how the company handles its expenses and capital expenditures. The way a company spends and invests its money can provide investors clues about the direction of the company. Lockheed Martin only paid out 46% of its free cash flow in dividends in FY 2015. Currently, the company pays its shareholders $6.60 per share per year, translating into an annual yield of 3%.

Lockheed Martin’s most recent balance sheet showed nearly $1.1 billion in cash, representing 35% of stockholder’s equity. However, investors should eye its long-term debt balance, which increased 133% YoY in FY 2015. Currently, Lockheed Martin’s $14.3 billion in long-term debt equates to an incredible 462% of stockholder’s equity, which is excessively high. However, times interest earned came in at 12 in FY 2015. Five or more is generally considered good.

Concluding thoughts

Regardless of how Lockheed Martin performs when it reports next week, investors should consider this company for further research. The company provides needed products necessary for the security of society. However, they should eye its ballooning long-term debt and any corresponding interest costs. Lockheed Martin trades at a P/E ratio of 20 versus 24 for the S&P 500, making it undervalued relative to an expensive market. Finally, investors can collect a decent income from dividends while waiting for potential capital gains.

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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