What happened
An analyst has increased his price target on Lockheed Martin (LMT 0.32%), based upon the potential for more stock buybacks and an eventual windfall from the current conflict in Europe. Investors are buying in and sent the stock up as much as 5% on Monday.
So what
Lockheed and other defense contractors have been in focus since late February, when Russia invaded Ukraine. Although the conflict has galvanized Europe and should lead to an eventual uptick in defense spending, these deals take time, and there's unlikely to be a near-term impact to sales and earnings.
Image source: Lockheed Martin.
But Lockheed Martin does have some near-term ways to support its stock price while waiting for the order book to grow. Earlier this year, Lockheed called off its planned $4.4 billion acquisition of Aerojet Rocketdyne Holdings. Cowen analyst Cai von Rumohr says that the move frees up cash for Lockheed to dramatically expand its share-repurchase program, estimating that each incremental $1 billion in shares repurchased would add about $0.25 per share to annual earnings.
Cowen has a market-perform rating on Lockheed Martin, but von Rumohr raised his price target to $435 from $390.
Now what
Lockheed Martin's shares were in the doldrums prior to Russia's invasion of Ukraine, with investors worried that new programs that could be catalysts for future growth were unlikely to materialize before 2023, at the earliest. That's still largely the case, but for patient investors, there's reason to like Lockheed Martin.
The Ukraine conflict should indeed support higher defense spending in the U.S. and across NATO, and Lockheed helicopters, Javelin missiles, and other products seem likely to be a part of any future orders. The conflict has also opened new markets to Lockheed Martin's flagship F-35 Joint Strike Fighter, with Germany coming on board as a customer in recent weeks.
Patience is required, since government appropriations take time and, as von Rumohr notes, the F-35 line is sold out for several years. But if you factor in Lockheed Martin's 2.5% dividend yield and the prospect of accelerated stock buybacks in 2022 and beyond, there's a solid reason for income-focused investors to take a hard look at the company right now.
