Is Lockheed Martin the Perfect Stock?

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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Lockheed Martin (NYSE: LMT  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Lockheed.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 4.7% fail
  1-Year Revenue Growth > 12% 8.1% fail
Margins Gross Margin > 35% 10.5% fail
  Net Margin > 15% 6% fail
Balance Sheet Debt to Equity < 50% 128.1% fail
  Current Ratio > 1.3 1.20 fail
Opportunities Return on Equity > 15% 75.9% pass
Valuation Normalized P/E < 20 10.14 pass
Dividends Current Yield > 2% 4.3% pass
  5-Year Dividend Growth > 10% 20.3% pass
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 4, Lockheed doesn't qualify as the perfect stock. Despite its vulnerabilities, though, the company does have some good prospects going forward.

Lockheed is well-known for producing military fighter jets for the U.S. government, but its business goes a lot further than that. Lockheed also makes electronic systems, develops information technology systems, and produces satellites and other space-based applications for both military purposes and space exploration.

In the past, Lockheed has done a good job of partnering with other companies in the defense space to win lucrative contracts. With its F-35 Lightning II fighter jet, for instance, Lockheed worked with subcontractors including General Electric (NYSE: GE  ) and Northrop Grumman (NYSE: NOC  ) to beat out competitor Boeing (NYSE: BA  ) and win the Pentagon bid -- a job that could bring in $1 trillion in revenue. It has also recently brought in contracts to work on computer systems for the Social Security Administration and surveillance systems for New York City's subways.

The big challenge for Lockheed, though, is maintaining its strength in a hostile environment for defense spending. Raytheon (NYSE: RTN  ) and Boeing have already suffered major losses from budget cuts, and despite Lockheed's diverse business segments, it remains dependent on government spending to a large extent. Its low margins and fairly high debt load show the capital intensity of its business, and an unexpected downturn could hit the company hard.

The nice thing is that those fears are reflected in the stock's attractive valuation. And with a strong dividend yield, Lockheed rewards shareholders willing to take those risks. Lockheed isn't the perfect stock, but if you think predictions of fiscal austerity are overblown or that a relatively peaceful globe may turn hot in the coming years, Lockheed could make a good stock for your portfolio.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Lockheed Martin to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (2)

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 December 27, 2010, at 5:25 PM, kheiss171636 wrote:

    Fools Rules The title is another subcategory of the old buyer beware. This is just a little different instead of walking into a home to view and trust in contractal policy of real estate policy, another contract for another deal.. Fundamentaly one if you go to an internet site you follow there guideline its there web page. If you do not know where you are going on an intenet site don't go unless you are a fundamental digger. looking for underdeveloped or virus. Policy's of this site are good I feel it is necessary to place strict boundary

    s on users. Whats the old saying snooze you looze, Dump all the slangers. FyI keep up to date to many of too much is not too good. Kim

  • Report this Comment On December 31, 2010, at 2:00 AM, AirForceGuy wrote:

    The U.S. Air Force needs new fighters, new bombers, new tactical airlift aircraft (C130J) and new tankers. The end of the war means naught in fact the war is only wearing down the flying hours of our fleet and making the need for an overhaul even greater. The challenges the U.S. is facing are still there. The Chinese for example are testing its own stealth fighter. The technology race is still on and our adversaries are quickly catching on!

    Almost the entire U.S. Air Force fleet requires an overhaul, we are still flying Vietnam era B52s and all these aging airplanes are well over the flying hours they were design for and need to be replaced. The end of the war would mean a shift from operational expense to the actual acquisition of the weapon systems. I’m talking about retiring the aging C130E and C130H to be replaced for the new C130J models. I’m also talking about the acquisition of the newer F35 fighter jets to replace older fighter models. All made by Lockheed!

    Also the emerging economies mean that many other countries will be going to be improving their military too. For example the recent purchase of C139J models by India.

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