Is Lockheed Martin Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Lockheed Martin (NYSE: LMT  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Lockheed Martin's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Lockheed Martin's key statistics:

LMT Total Return Price Chart

LMT Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

4.5%

Fail

Improving profit margin

(4.7%)

Fail

Free cash flow growth > Net income growth

(29.8%) vs. (0.5%)

Fail

Improving EPS

15.3%

Pass

Stock growth (+ 15%) < EPS growth

91.4% vs. 15.3%

Fail

Source: YCharts.
*Period begins at end of Q2 2010.

LMT Return on Equity Chart

LMT Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

212.6%

Pass

Declining debt to equity

558.2%

Fail

Dividend growth > 25%

82.5%

Pass

Free cash flow payout ratio < 50%

70.4%

Fail

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
Lockheed Martin doesn't come through with flying colors, as it's mustered only three out of nine possible passing grades. One source of that weakness is its falling free cash flow, which may be inadequate to support current dividend payouts if the trend continues. Investors have rushed toward the perceived safety of defense contracting, but the company hasn't rewarded anyone with fundamental improvements -- its EPS is on the upswing because of share repurchases. Will Lockheed Martin be able to move past these weaknesses and rebound, or is the aerospace giant going to be tarnished for some time to come? A defense contractor lives and dies on the depth of its contracts, so let's take a look at what Lockheed's got coming down the pipe.

The U.S. Department of Defense has awarded Lockheed with a number of military contracts lately. Lockheed, Raytheon (NYSE: RTN  ) , and six other defense contractors obtained a combined $960 million in IT contracts under the U.S. Air Force's Network-Centric Solutions-2 Application Services program. These contracts will run for three years, with a potential for up to four more "optional" years.

Fool contributor Rich Smith notes that the U.S. Department of the Interior has awarded Lockheed a $1 billion contract to establish a cloud-based services platform which will handle all the data and applications currently stored in more than 400 government data centers. Lockheed has also bagged a $223.3 million contract from the government of South Korea for a supply of night vision sensors. Javelin, a joint venture between Lockheed and Raytheon, recently won a $67.7 million contract to supply Javelin Block I Tactical Missile Rounds to the U.S. Army and Marine Corps.

In addition, Lockheed recently gained a $48.8 million option contract from the Pentagon to provide technical engineering and configuration management services for the U.S. Navy. The U.S. Department of Defense has also awarded Lockheed four different contracts worth $102.2 million in aggregate, to supply AN/AAQ-30 target sight systems and three Aegis modernization upgrade equipment sets, and to perform modernization on the Aegis combat system-equipped guided missile cruisers and destroyers.

Putting the pieces together
Today, Lockheed Martin has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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