Shareholders of defense contractor Lockheed Martin
For the full fiscal 2004, Lockheed grew its revenues by 12% and its operating earnings by just 3.5%. But net profits soared by a full 20%. How did it manage a number like that? For one thing, the company paid off $1.1 billion in debt in 2004, and that helped to rein in interest expenses. A 740 basis point reduction in the company's tax rate for the year also helped a bit, as the small decrease in taxes paid yielded a windfall in the amount of cash falling to the bottom line.
But the real story here is cash flow. Free cash flow raced far ahead of GAAP profits growth, nearly doubling from last year's $1.1 billion to $2.1 billion in 2004. At the company's closing price on Friday, Lockheed sported an enterprise value-to-free cash flow ratio of 13.3 -- not bad for a business growing profits and free cash flow alike at double-digit rates.
Long-term investors should beware, though: While analysts believe that Lockheed will extend this growth rate into next year, their extended outlook for the company calls for moderating earnings growth farther down the road, with a five-year projection of 10.5% average annual profit growth.
There's one other caveat to the general good news worth noting. Over the past year, Lockheed says, it bought back 14.7 million of its shares outstanding. But the company's income statement appears to show that the average number of diluted shares fell by just 2.9 million. So it seems that some stock dilution was afoot at the company this past year. Still, a back-of-the-envelope calculation suggests that total stock dilution pre-buybacks amounted to less than 3%, and that's the Foolish ceiling for tolerable dilution in a mature business like Lockheed.
And now, back to the good news. On Friday, the U.S. Navy announced that Lockheed -- leading a team consisting of ITT Industries
For more on Lockheed's recent doings, read:
Fool contributor Rich Smith has no position in any of the companies mentioned in this article.