Endless Strife Makes Lockheed Martin a 'Hold Forever' Stock
Another day, another mass killing. If you possess an ounce of humanity, you're reluctant to check the daily news. But successful investors deal with the world as it exists, not as they want it to be. The ugly truth is, violent strife will never go away and probably only worsen.
In this anxious age of terrorism, mass shootings and regional factionalism, the defense industry can expect long-term growth. Despite legislative gridlock in Washington, D.C. and other national capitals, most governments are on track to increase defense spending in the face of rising threats to social order. This political reality will last for years (if not forever), ensuring sustained demand for weapons systems.
The best play on the ceaseless need for defense is the world's largest military contractor: Lockheed Martin (LMT) - Get Report , which is scheduled to report second-quarter earnings on July 19. The average analyst consensus is that the Bethesda, Maryland-based behemoth will report earnings-per-share (EPS) of $2.94, in line with its EPS in the same quarter a year ago.
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If you want to add a defense stock to your portfolio, you should scoop up shares of Lockheed Martin now, ahead of its earnings report tomorrow. The stock has risen 18.34% year to date, but as we explain below, there's plenty of upside left.
With a market cap of $77.84 billion, Lockheed Martin dominates the global aerospace/defense sector. Lockheed's second-quarter revenue is expected to rise 8% year-over-year to $12.56 billion, as production for its F-35 Joint Strike Fighter ramps up. With its initial technical glitches largely resolved, the ultra-sophisticated stealth fighter burnished its credibility with a successful flight demonstration at the UK's influential Farnborough Air Show last week.
The $382 billion F-35 Joint Strike fighter program is considered the largest single global defense program in history. Each plane costs about $85 million; the company has delivered more than 170 operational jets so far.
Lockheed is on schedule to deliver 43 F-35s this year but it's also expanding its manufacturing facility in Texas so it can crank out 200 units of the combat fighter every year by the end of 2019. The F-35 is designed to replace aging aircraft in the U.S. military services, with variants tailored to the singular requirements of the Air Force, Marine Corps and Navy.
Eventually, more than 3,000 planes will be built for the U.S. and 11 other countries, at a total projected cost of $379 billion (which includes inflation). Overseas turmoil makes it likely that the F-35 will garner even more foreign customers over time.
The F-35 accounts for roughly 34% of Lockheed Martin's total revenue, making the plane's success a driver of sustained revenue growth. But Lockheed isn't completely dependent on the F-35. The company also makes a wide variety of other military products for the Pentagon and foreign customers. Lockheed's F-16 is one of the most prevalent and reliable fixed-wing fighters in the world, with a growing customer base as regional "hot spots" get hotter.
The F-16's growth prospects are especially strong in Asia where countries such as Japan are warily eyeing an expansionist China. Japanese Prime Minister Shinzo Abe's decisive electoral victory this month helps pave the way for his plans to change the country's pacifist constitution, which would probably prove a boon for Lockheed and its combat jet portfolio.
In addition to its core competency of combat fighters, the company makes missiles, satellites, coastal warships, and helicopters. This week, the company won two contracts, worth a combined $255.8 million, from the U.S. Special Operations Command and the Army for dry combat submersible systems and helicopter radar.
Lockheed Martin's stock has been on a tear this year but still trades at a reasonable valuation. The stock's trailing 12-month price-to-earnings (P/E) ratio stands at 22.73, not exorbitant compared to major rivals Boeing (17.89) and Northrop Grumman (20.11). Lockheed's dividend yield is a robust 2.57%, making the stock a solid total return play on an unstoppable trend.
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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, Persinos held stock in Boeing.