Please ensure Javascript is enabled for purposes of website accessibility

Lockheed Martin Predicts a Big Earnings Beat in 2018

By Rich Smith – Feb 2, 2018 at 8:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

But do keep an eye on the cash -- if you can find it.

Lockheed Martin (LMT -2.13%) stock popped 2% on Monday after reporting fiscal Q4 and full-year 2017 earnings. Lockheed stock gave back only a small fraction of a percent of that gain on Tuesday, a day when the Dow Jones Industrial Average sank nearly 1.4%

Clearly, Lockheed Martin did something right last quarter, but what? Let's find out.

F-35 fighter jet seen head-on

Lockheed Martin stock looked positively photogenic in its Q4 close-up this week. Image source: Getty Images.

First, the bad news

At first glance, it's hard to see what all the fuss is about. Lockheed's earnings in fiscal Q4 2017 ... well, there weren't any earnings. Thanks to a $1.9 billion "one-time charge related to tax reform," Lockheed actually reported a $2.25-per-share net loss for the quarter. That being said, if tax reform hadn't happened, Lockheed would have done well in Q4. Really well.

And now the good news

Lockheed booked $15.1 billion in sales in Q4, up 9% from Q4 2016. Sales for 2017 as a whole grew 8% to $51 billion.

Adjusted earnings from continuing operations -- excluding the tax charge -- surged to $4.30 per share in Q4, and $13.33 for the year as a whole. And because "substantially all" of the tax charge was non-cash, it didn't prevent Lockheed from generating $1.5 billion in operating cash flow in Q4 (double what it produced in Q4 2016), and $6.5 billion for the year (up 25% year over year).

Lockheed Martin CEO Marillyn Hewson called these results "outstanding," and it's hard to disagree.

More good news

Believe it or not, we haven't yet reached the best part. Thanks both to an accounting change and to an expected lower tax rate from tax reform (the flip side of Q4 2017's tax-related charge to earnings), Lockheed Martin has drastically raised guidance for what it expects to sell, and earn, in 2018.

Sales guidance for this year has been raised to about $50.75 billion, basically flat against 2017 sales. But Lockheed is looking to book about a 13.5% operating profit margin on its sales, and to report net earnings of about $15.35 per diluted share. That's not just more than twice Lockheed's tax-reform-depressed earnings of 2017. It's about 15% better than the adjusted earnings that Lockheed says it would have earned in 2017 if tax reform had not happened -- not bad for a zero-sales-growth year.

It's also significantly more than Wall Street had expected Lockheed to promise. As of the last report, analysts who follow Lockheed were predicting the company would earn only $14 per share this year. Lockheed just promised to beat that estimate by a buck-thirty-five, or nearly 10%.

Wrapping up with a final bit of bad news

Summing up, Lockheed Martin's fourth quarter and full-year 2017 earnings report was pretty chock-full of good news, Q4 net loss notwithstanding. That's not to say, though, that Lockheed's report was entirely devoid of worrisome notes.

Chief among these: In the course of giving strong earnings guidance for 2018, Lockheed management also let slip that it expects to experience a big decline in cash flow this year. Indeed, Lockheed expects the $6.5 billion in cash it produced in 2017 to shrink by more than half in 2018, to a bit more than $3 billion.

With Lockheed Martin stock now trading for close to $102 billion in market capitalization, that means the stock now sells for close to 34 times the amount of cash flow it expects to produce this year -- a very high multiple, especially considering that we're talking about mere cash flow here, and not free cash flow, which takes cash from operations and subtracts out the cost of capital spending. (For context, capital spending in 2017 was $1.2 billion. If Lockheed spends that much again in 2018, its free cash flow for this year could be cut nearly in half, to just $1.8 billion.)

Long story short, once you factor capex into the equation, Lockheed Martin's free cash flow is going to slow to a trickle this year -- and accordingly, its price-to-free cash flow multiple will surge much higher.

True, for the time being this doesn't seem to be worrying investors. But if you're looking for something to worry about in the context of Lockheed Martin's historically expensive stock price, I think the P/FCF ratio is a good place to look.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
LMT
$413.07 (-2.13%) $-9.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.