Escalating global tension and international conflict is good for the military industry and stocks like Lockheed Martin (NYSE: LMT). The conflict in Ukraine and the new war in Israel have governments worldwide replacing and ramping up stockpiles of material and ammunition, which is clearly seen in the company’s results. Volume is rising in critical segments and enough to offset weakness in others.
The takeaway for investors is that Lockheed Martin continues to produce profits and uses the money to pay its shareholders. The company’s dividend and share repurchase program is among Wall Street’s most reliable and powerful tailwinds for share prices. The stock also provides relative value trading at 16X earnings, fairly valued relative to the broad S&P 500 and less than what you pay for competitors like Northrop Grumman Corporation (NYSE: NOC) and General Dynamics Corporation (NYSE: GD).
Lockheed Martin Outperforms, Increases Capital Return Program
Lockheed Martin had a solid quarter with strength in Missile & Fire Control, Rotary & Mission Systems, and Space, offsetting weakness in Aerospace. The company reported $16.88 billion in net revenue for a gain of 2% compared to last year, beating the Marketbeat.com consensus by $0.160 billion.
Segmentally, RMS led with a gain of nearly 9%, followed by a 7.5% increase in Space and 3.8% in MFC. Volume is the largest contributor to gains in those segments, offset by a 5% decline in Aerospace. Aerospace is down primarily because of the F-35 program and the timing of budgeted orders; other subsegments produced growth driven by demand.
The margin news is mixed but favorable to shareholders. The company’s adjusted and operating earnings fell compared to last year, but the margin declined less than expected. The decline is primarily due to rising costs, offset by internal operational improvement and volume leverage. The salient point is that $6.77 in adjusted EPS is down $0.10 compared to last year but beat the consensus by $0.15 and doubled the top-line outperformance.
Guidance is as expected, which did not lift share prices immediately after the release. However, guidance expects modest top-line growth and a modest bottom-line contraction with earnings and FCF sufficient to increase the capital return program and not upset the company’s financial position.
The board authorized a $0.15 quarterly share increase, making the 21st consecutive annual increase. The yield is about 2.85% and compounded by share repurchases. Repurchases more than doubled the effective yield to investors, and the authorization for future repurchases was increased. The board nearly doubled the allotment to $13 billion, worth more than 11.5% of the pre-release market cap.
Analysts and Institutions Hold Lockheed Martin
Marketbeat is tracking 16 analysts with ratings on LMT stock, and they are Holding. The Hold rating has been firm and steady since last year, compounded by a price target with a 10% upside relative to the pre-release price action. The price target is up compared to last year but down since the summer due to some downward revision and initiated coverage, but it may begin to rebound now that guidance is reaffirmed.
Institutional activity is similar in that it favors higher share prices over the long term but has helped cause volatility in the near. Institutions own more than 75% of the stock and have bought on balance for the trailing 12-month period, but net activity was bearish in Q2 and Q3 of 2023. That activity coincides with the decline in share prices that produced the opportunity today. Coincidentally, the net institutional activity in the first weeks of Q4 is bullish.
The Technical Outlook: Lockheed Martin Pulls Back the Hammer
The LMT market sold off slightly following the Q3 release, but the action is still above critical support and consistent with a trend-following signal. This market has been trending strongly higher since 2019 and recently bounced from the trend line. The market is currently above critical support at the 150-day EMA but facing resistance at the 30-day. A vigorous rally may follow if the market can get above the 30-day EMA. If not, this stock may continue consolidating at the current levels before the rally continues.
