10 Core Stocks for Your Portfolio: Lockheed Martin

"Blue Chip." "Nifty 50." "Rule Maker."

Over the years, investors have invented many names for the "perfect stock" -- the one you can buy, own, and hold forever (give or take a week). Today, I want to suggest one more name for your consideration. The real perfect stock, the one that deserves a place in your portfolio today, tomorrow, 10 years from now, and beyond: Lockheed Martin.

Who It Is

Lockheed Martin (NYSE: LMT  )

What It Does

Everything President Eisenhower ever warned you about the military-industrial complex -- and it does it for a nice profit.

Recent Price per Share


Market Cap

$25.97 billion





P/E = price-to-earnings ratio. ROE = return on equity.

The business
I can't tell you all about Lockheed in the 800 words I've been allotted today. Instead, I'll sketch out just a few key areas of this business, and why they're bound to keep this company looking attractive and making money for its shareholders well into this century, and beyond.

Broadly speaking, Lockheed consists of four business segments:

  • Aeronautics: fighter jets, transport aircraft, unmanned aerial vehicles and the like.
  • Electronic Systems: primarily systems in support of military equipment.
  • Information Systems & Global Solutions (IS&GS): a catch-all ranging from government IT contracting to programs supporting troops abroad.
  • Space Systems: satellites, strategic missile defense, and space exploration.

The first three businesses contribute roughly equal percentages of Lockheed's revenues, with space systems trailing behind at about a 20% share of the business. Profits-wise, aeronautics and electronic systems are the most profitable units, contributing about 35% of pre-tax profit apiece. IS&GS and space make up the balance.

Why it's a core stock
But as I say, this is just a broad outline. Like most defense contractors these days, Lockheed is constantly evolving, shifting emphasis from one business segment to another, spinning off "non-core" businesses and dipping its toes into the water on new opportunities, such as last week's announcement that Lockheed will participate in a seven-year, $2.8 billion project to update the Social Security Administration's computer systems, or last year's contract to create a surveillance camera system for the New York subway system.

To me, though, it's the core of Lockheed's business -- fighter jets -- that makes this company a core stock for any investor's portfolio. When Lockheed and its team of subcontractors, including Northrop Grumman (NYSE: NOC  ) , General Electric (NYSE: GE  ) , and United Technologies (NYSE: UTX  ) , beat out a rival team led by Boeing (NYSE: BA  ) in the contest to build the Pentagon's F-35 Lightning II fighter jet a few years ago, Lockheed did more than win a contract. It won the contract to build what U.S. Joint Chiefs Chairman Adm. Michael Mullen predicts will be "the last manned fighter" jet ever to be built.

It's hard to overstate just how important the F-35 is to Lockheed, and to investors looking for a stock to own for the long term. Defense industry pundits believe F-35s will still be flying 60 years from now, and will generate roughly $1 trillion in sales for Lockheed domestically. But that's just the beginning. F-35 is an international effort, with foreign partners expected to buy roughly one-third of all the planes Lockheed will build over the next six decades. Add these sales to the mix, and F-35 becomes potentially a $1.3 trillion project.

To put this in perspective, F-35 alone has the potential to secure half of Lockheed's annual revenues over the next 60 years. Suffice it to say I have every confidence the other planes that Lockheed's aerospace unit builds, combined with the multitudinous products from electronics, IS&GS, and space, will have little trouble filling out the remaining half.

There is, of course, a risk to the stock, in the form of defense spending cuts. For the past several months, Secretary of Defense Robert Gates has been running 'round the Pentagon halls, waving a hatchet and looking for programs to cut. Already, high-profile projects led by Raytheon (NYSE: RTN  ) , SAIC (NYSE: SAI  ) , Boeing, and others have fallen victim to Gates' budgetary ax.

But for a long-term investor, fears of a short-term falloff in military spending spell opportunity. Opportunity in the form of a company expected to grow its profits north of 8% per year over the next five years, bolster those returns with a 3.6% annual dividend, yet cost you a mere 9.1 times earnings to own.

In sum
If you're looking for a company to own for the long term, a business that's practically guaranteed to be selling its product for the next 60 years has to sound attractive. When that business is selling for a discount, that only adds to the attraction. To my Foolish eye, there's only one company in the world that meets both these criteria: Lockheed Martin.

SAIC is a Motley Fool Inside Value recommendation. Fool contributor Rich Smith has no position in any of the stocks named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 568 out of more than 160,000 members. The Motley Fool has a disclosure policy.

The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Read/Post Comments (4) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2010, at 10:03 AM, nickolassc wrote:

    I chose RTN over LMT based on the number of small diverse contracts that RTN has (over 8,000) which provides safety if some of them are cut. I would worry that with something like the F35 program, although an unlikely scenario, if that program flops or is cut back, it could sink LMT or other contractors who are heavily dependent upon it. Also RTN has grown their dividend nicely the last several years and with it's recent price beat down, yielding around 3.3%

  • Report this Comment On September 23, 2010, at 11:38 AM, tr4head wrote:

    This is typical over optimistic BS by the Motley Fool Gardner Bros. I really am amazed at their resiliance as prognosticators and as stock market "gurus" in light of what they were doing during the New Age bubble. Do you remember? They were some of the leading practioners of the new age style of stock picking, justifying outrageous PEs with the more valid "new economic measures" and the "trend is your friend philospohy". Crap, and many ()not me) lost their shirts listening to them. They have no shame and continue in the business, without regret.

  • Report this Comment On September 23, 2010, at 11:58 AM, rsinj wrote:

    great timing you typed that LMT raised their divided 19% so it is now yielding over 4%.

    As I've stated elsewhere, LMT is the better buy because on every fundamental metric it is better than RTN. As far as issues with the F35 program, forget it. Long ago all forces agreed it would be the only plane going forward and will enjoy great sales overseas as well. Maybe you also missed the news this morning for 35 more for $5 billion?

    RTN is overpriced.

  • Report this Comment On October 05, 2010, at 3:08 PM, rmani81 wrote:

    I also chose LMT of RTN for the reasons above. the div raise says a lot by management and the company has a track record for 100 years of always rebounding and doing right by their shareholders.

    RTN is also a good company, but I felt safer with LMT knowing their track record, and the higher div yield and lower P/E made it the more attractive buy for me.

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