Lockheed Martin (NYSE:LMT) could be trading at $700 (currently 485ish). The bull case continues to unfold as Lockheed Martin benefits from (at least) three major tailwinds.
Favorable market and economic developments benefiting value stocks;
Improving global defense spending - that's a long-term benefit;
Lockheed's ability to deliver the right products and improve its business.
Over the past 12 months, all major defense contractors outperformed the S&P 500. Lockheed Martin, which was the second-best performer in the industry. In this case, it's not just the war in Ukraine but also China's pressure on Taiwan and de-globalization, which causes global defense spending to rise. The United States is stepping things up. The new omnibus package includes a 10% defense spending increase to $858 billion. This number is much higher than the 4% increase President Biden originally targeted. Defense contractors are now finally able to move on from the Continuing Resolution. These numbers indicate that the defense budget will have grown at 4.3% per year over the past two years - even after inflation. The average was less than 1% between 2015 and 2021. This is a significant shift in spending. Lockheed Martin's stock price peaked in 2020 when the pandemic hit. In 2023, sales growth is expected to be just 0.8%, after a 2.7% contraction in 2022. These two years are some of the weakest in recent history. In 2024, sales growth is expected to pick up, with higher growth expected after that. Moreover, the company hiked its dividend by 7%. LMT shares now pay a $3.00 per quarter per share dividend. This translates to a 2.5% dividend yield. Lockheed's total return of the past 12 months exceeds 40%. In other words, a lot of good news has been priced in. The company is now trading at 14.6x 2023E EBITDA of roughly $10.0 billion. This is based on its $127.5 billion market cap, $12.6 billion in expected net debt, and $5.7 billion in pension-related liabilities. A forward multiple of 14.6x is everything except cheap. It's a fair valuation given the bigger picture. Needless to say, I believe that LMT is a must-own investment. The company has a stellar business model, anti-cyclical behavior, subdued volatility, and the ability to outperform the market on a long-term basis while providing steadily rising income through dividends.
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