Cathie Wood, CEO of Ark Invest, has taken the Exchange Traded Fund (ETF) industry by storm. In 2019, her five actively managed funds won "ETF Suite of the Year" at The Mutual Fund Industry and ETF Awards. On cue, all five of those actively managed funds more than doubled in 2020 compared to a 43% gain in the Nasdaq.
The smallest of those five ETFs, the ARK Autonomous Technology and Robotics ETF (ARKQ 1.75%) has been buying shares in aerospace and defense contractor Lockheed Martin (LMT -0.27%). With 272,835 shares, Lockheed is currently the fund's 12th largest holding and makes up 2.7% of its portfolio. Here's why Lockheed is a good fit for this ETF, and why it could be a good fit in your portfolio as well.
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Why Cathie Wood likes Lockheed Martin
When Cathie Wood buys stock, people listen. Her reasons for buying Lockheed probably have more to do with the company's space business than anything else. Space exploration makes up over 6% of the Autonomous Technology and Robotics ETF. There's also the possibility that Ark will launch a sixth ETF dedicated to space. For a company facing stagnant U.S. defense spending, space could be one of Lockheed's few growth segments in the years ahead.
An established business
Space isn't a new idea at Lockheed Martin. It's one of four established business segments at the company. With $11.88 billion in 2020 revenue and $1.15 billion in operating profit, space comprised 18.2% of Lockheed's total revenue and 16.1% of its operating profit. Lockheed's space segment researches, designs, and develops satellites, missile systems, and transportation systems used mainly for intelligence data and national security.
Satellite products and services make up the largest chunk of the space division -- comprising over 60% of 2020 space sales and 11% of Lockheed's overall consolidated sales in 2018, 2019, and 2020. A big part of Lockheed's space strategy is pairing new technologies with its existing assets or building entirely new defense assets. The U.S. government, which comprised 87% of Lockheed's space sales in 2020, is keen on introducing 5G and other technologies throughout its space domain. Satellites play a big role in this development.
In its fourth-quarter 2020 conference call, Lockheed announced it had landed a $4.9 billion contract for three military defense satellites and ground systems that can detect and warn against incoming ballistic or tactical missile launches anywhere in the world. In August 2020, it won a $188 million contract to build 10 satellites for the U.S. Space Development Agency. The satellites will form a new "tracking layer" as part of a missile detection network that will span multiple domains and provide data transport capabilities using 5G technology. These kinds of national security contracts are what Lockheed has been doing for years.
The rise of hypersonic missiles
Aside from satellites and other nuclear defense programs, one of the key components of Lockheed's space segment is hypersonics. China, Russia, and the U.S. Army and Navy are keen on equipping hypersonic weapon capabilities to outmaneuver existing defense systems. Lockheed Martin is serving the U.S. Army as a weapons system integrator for the country's first hypersonic glide body prototypes.
Lockheed is a leader in this category, a position it wants to retain assuming hypersonic spending increases in future years. To illustrate the significance of U.S hypersonic spending, consider that the Department of Defense's fiscal-year 2021 budget proposal called for $3.2 billion in hypersonic spending, which is 44% of its Advanced Capabilities Enablers budget (the other investments being AI, microelectronics and 5G, and autonomy).
Lockheed's $5 billion acquisition of Aerojet Rocketdyne, which makes rocket propulsion systems and hypersonic engines, is meant to bolster its hypersonic capabilities. James Taiclet, CEO of Lockheed Martin, said the following on the company's fourth-quarter conference call:
I view Lockheed Martin's benefit or role in defense enterprise as adding velocity to it. The world is moving faster both kinetically, if you will, and in a networking and AI perspective as well and we need to speed up and just taking one dimension of that hypersonic missiles and countering hypersonic missiles requires a much better tighter integration of the propulsion system into the body of the missile... Aerojet's expertise in propulsion systems will benefit our existing hypersonic programs as they progress from development to production and will improve our tactical missiles and air and missile defense products.
The verdict
Lockheed's space division is doing exciting things -- but buying its stock for the space division alone might be a stretch. Rather, what makes Lockheed an interesting value stock is its low P/E ratio of 14.5, a strong balance sheet, and a stable and growing dividend (which currently yields 2.9%). Cathie Wood may be buying the defense stock for a special reason, but there's a lot more to like about the company than just space.
