The fourth-quarter earnings season has officially begun.
Defense contractor Lockheed Martin (LMT 1.79%) was one of the first large stocks to report its earnings for the last three months of 2023, giving investors insights into the state of its business and the overall sector. Its shares have trailed the market in recent quarters, with the stock down 6% in the last 12 months, while stocks like the "Magnificent Seven" have soared.
Lockheed Martin's Q4 earnings brought more of the same. Even though the company posted analyst-beating earnings and revenue for 2023, the stock fell around 5% the day after it reported its results, which included disappointing financial guidance for 2024.
Investors have soured on Lockheed Martin stock for 2024. Does that make now a perfect time for long-term investors to start a position in the stock?
Steady and long-duration contracts
Investors love businesses with high predictability. Lockheed Martin's fighter jet and aeronautics division is one of the most predictable in the world. The company signs long-term contracts for jets with the U.S. government and its allies that can run for decades. For example, the current F-35 delivery contract with the U.S. Department of Defense runs through 2044, with maintenance costs recurring long thereafter.
Luckily for investors, the aeronautics division is also highly profitable. In 2023, it generated an operating profit of $2.8 billion, or 33% of Lockheed Martin's consolidated profits. With durable contracts and minimal competition, investors should expect consistent and steadily growing earnings from this division year after year.
Lockheed is more than just fighter jets, though. It has missiles, rotary systems (i.e., helicopters), and space divisions that help diversify its operations. All three of these divisions generated more than $1 billion in operating earnings last year.
Overall, Lockheed Martin generated $8.5 billion in operating earnings and $6.2 billion in free cash flow. In 2024, it is guiding for $6 billion to $6.3 billion in free cash flow generation.
With war activity rising around the world, countries are turning to Lockheed to fortify their defenses. For example, just this week, Israel signed a deal with the company to supply the country with 25 F-35 fighters. It is no surprise then to see Lockheed Martin's backlog hit a record $160.6 billion at the end of 2023.
NYSE: LMT
Key Data Points
Innovative research and a next-generation fighter
On top of steady contracts from existing technology, Lockheed is well-known for being one of the most forward-looking and advanced defense research institutions in the world. For reference, it spent $1.5 billion just on research and development in 2023.
This has led to some recent breakthroughs. Perhaps most important is the unveiling of the X-59 aircraft from its Skunk Works Division. It is not commercially ready yet, but the X-59 promises a supersonic aircraft -- meaning flying faster than the speed of sound -- without a sonic boom.
This may not seem important, but there is a ban on commercial supersonic flight over land right now due to sonic boom disturbances. Eliminating the sonic boom could open up a new era of flight for Lockheed Martin and any other company looking to license its technology. That sounds pretty valuable to me.
There is also the Next Generation Air Dominance platform, otherwise known as NGAD. This is a sixth-generation fighter for the Department of Defense, and Lockheed Martin is the front-runner to win the contract. Its only competition right now is Boeing, but given the quality control issues it is having at the moment, it seems likely that Lockheed Martin will win the deal. This would set up Lockheed for more lengthy fighter jet contracts with the U.S. government and its allies.
From a business perspective, these technological breakthroughs are the main reason the U.S. government will choose Lockheed Martin for contracts. More contracts mean more revenue and profits, which is what shareholders are looking for at the end of the day.
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Consistently returning capital to shareholders
Lockheed Martin is in a defensible (pun intended) position as one of the dominant U.S. defense contractors. But on top of this, it has a management team that consistently rewards shareholders through its capital returns program. Just in 2023, it spent $9 billion on dividends and share buybacks. It currently has a price-to-earnings ratio (P/E) of 15.5, well below the S&P 500 average of 26.5.
At a market capitalization of approximately $100 billion, Lockheed Martin can provide solid total returns to investors over the long haul if it keeps up these buybacks and dividend payments. The stock's dividend per share has grown by 145% in the last 10 years, while its shares outstanding have fallen by 25%. Management has guided for these trends to continue in the coming years.
Combine these consistent capital returns with the high predictability of Lockheed Martin's defense contracts, and I think the stock can be a winner for those who hold for the long term.
