As everybody and his uncle raves about growth stocks and the "Magnificent Seven," value investors needn't lose confidence as it's perfectly normal for the market to rotate between highfliers and bargains. So, if you're willing to wait for value to come back in vogue, take a look at Lockheed Martin (LMT -0.75%) stock and consider its comeback potential.
Lockheed Martin's value doesn't necessary derive from traditional valuation metrics. Rather, it's all about knowing what's holding the company back in 2023 -- and what's possible if Lockheed Martin can overcome this challenge. Contrarians and value-focused investors should seek out opportunities like this one. Let's explore.
Surpassing Wall Street's estimates
When picking out a top value stock, it's worthwhile to look at a company's P/E ratio, but that's not the be-all and end-all. Lockheed Martin's non-GAAP trailing P/E ratio of 16.4 is slightly below the sector median, and the company's GAAP trailing P/E ratio of 20.9 is roughly in line with the sector, but that doesn't tell the whole story.
Meanwhile, Lockheed's stock is down year to date while the major stock market indexes are firmly in the green. Not only that, but the shares declined after Lockheed released its second-quarter 2023 results even though the company surpassed Wall Street's top- and bottom-line estimates. Lockheed Martin also raised its full-year sales and profit outlook.
Here are the Q3 results in a nutshell. The aerospace and defense company reported $16.7 billion in sales, up 8% year over year and outpacing Wall Street's call for $15.9 billion in sales. Meanwhile, the company posted $1.68 billion in net earnings, a huge improvement over the $309 million reported in the year-earlier quarter. On a per-share basis, analysts had expected Lockheed Martin to report earnings of $6.45 but the actual figure was $6.63.
A big backlog and a big challenge
Looking ahead to the full 2023 year, Lockheed Martin raised its sales forecast from $65.5 billion to around $66.5 billion and its profit outlook from $26.75 per share to $27.10 per share. Thus, the company served up a classic quarterly beat-and-raise. What more could investors ask for?
Apparently, this wasn't enough as Lockheed Martin stock dropped after the quarterly press release. Certainly, financial traders mustn't have objected to the demand for Lockheed Martin's weapons, which has ramped up due to U.S. tensions with Russia and, to a lesser degree, with China. Indeed, the company's orders exceeded its ability to fulfill those orders to the point where Lockheed announced a record quarterly backlog of $158 billion.
Most likely, the market saw the glass as half-empty since Lockheed Martin's ongoing challenge will be to fill all of those orders. Indeed, it's hard to predict the future ebbs and flows of supply chain slowdowns. Unfortunately, Lockheed's forecast of 100 to 120 F-35 jet deliveries in 2023, versus 141 F-35 deliveries in 2022, doesn't provide much clarity in this regard.
So perhaps the best approach is for value investors to hold a few Lockheed shares and wait patiently in hopes of easing supply chain constraints. Certainly, it's better to have too many orders than not enough, so Lockheed Martin's curse might also be a blessing.
In any event, patience should pay (literally) as Lockheed's shareholders can collect a 2.54% annual dividend yield (versus the sector average yield of 1.64%) while they wait for the company to reduce its backlog, which I'm sure Lockheed Martin is doing as fast as it possibly can.
