Partway through the fourth and final quarter of fiscal 2007, warplane maker Lockheed Martin (NYSE:LMT) reported its fiscal Q3 numbers early yesterday morning. While the rest of the financial media is focused only on the quarter-by-quarter performance, let's chart a different course today and examine how Lockheed's year-to-date performance stacks up against last year's numbers.

Macro story
Year to date, Lockheed has:

  • Grown sales 8% over fiscal 2006, to $31 billion.
  • Increased profits per diluted share 26% to $5.21.
  • Generated $3.8 billion in operating cash flow. After $480 million in capital expenditures, that leaves free cash flow of $3.3 billion.

Based on these numbers, management expects to finish out the year with somewhere between $41 billion and $41.75 billion in sales, $6.70 to $6.85 per share in profits (a nickel more than previously forecast), and more than $4.2 billion in operating cash flow.

Micro story
Breaking down the macro story to review Lockheed's performance by business segment, we quickly see how a multibillion-dollar company can transform single-digit sales growth into strong double-digit profits growth. Lockheed's two biggest businesses, aeronautics and electronics, may not be its fastest growers ( YTD revenues were up 6% and 7%, respectively). But they were its two biggest improvers by operating margin. The operating margin in electronics expanded by 110 basis points, making it the most profitable business, with a 12.8% margin. In aerospace, operating margins expanded twice as fast, up 220 basis points to 11.7% -- the second-best margin at the company.

So what's not to like?
And yet, Lockheed's superb earnings results didn't translate into any gain whatsoever in stock price yesterday. Why not? Judging from analyst comments, as relayed by the mainstream press, investors fear the profitable aerospace business is headed for turbulence as the U.S. Air Force shifts from ordering Lockheed's well-entrenched F-16 offerings, to Lockheed's next-generation warplane, the F-35 Lightning II (which beat out Boeing's (NYSE:BA) next-gen offering back in 2001). After F-35 sales have ramped up, Lockheed and its partners and subcontractors, Northrop Grumman (NYSE:NOC), BAE, General Electric (NYSE:GE) and United Technologies (NYSE:UTX) should make plenty of profits on the F-35. But investors fear a slump in profits while F-16 sales wind down.

Still, assuming analysts are close to correct in predicting 12% annual profits growth over the next five years, and that Lockheed is right in predicting $4.2 billion in operating cash flow (so let's guesstimate $3.6 billion or so in free cash flow), that would give the stock a current price-to-free cash flow ratio of 12. In my view, that's perfectly reasonable for a 12% grower.

Look, up in the air! What's Lockheed been up to lately? Find out in: