Stock of the Day - April 12, 2009 - LMT

Lockheed Martin Corporation (LMT)

Lockheed Martin (LMT) is the world’s largest military weapons maker, and it is the Pentagon’s biggest contractor by sales.  The company’s main competitors include Boeing (BA), Northrop Grumman (NOC), and General Dynamics (GD), all three of which are also defense companies.

Lockheed Martin, which is currently trading at $73.32, is around 40% below its 52-week high of $120.30, and it has lost 15% of its stock value in 2009.  I think Lockheed Martin is undervalued right now in the $70’s, as the lack of certainty about the company’s future earnings power has kept the share prices down.

Companies like Lockheed Martin are extremely dependent on government decisions in regards to military spending, as 85% of LMT’s sales come directly from the U.S. Government.  So, while investors and analysts eagerly anticipated Defense Secretary Robert Gates’ defense budget plans that were announced last week, there was heavy selling pressure due to uncertainty about the budget plans.  Many investors and analysts believed that the Obama administration would be drastically cutting the defense budget, as the current administration’s agenda seems to be focused less on the military than George Bush’s was. 

But, Gates’ proposed budget plans came as a surprise to many people who thought he would cut spending, as he proposed a $534 billion defense budget (up 4% from last year).  While this might sound great, a 4% increase implies that spending will essentially stay flat when accounting for inflation.  So, what did the budget plan include that will directly affect Lockheed Martin?

One of the most controversial issues in the proposed budget is Gates’ plan to limit Lockheed Martin’s F-22 Raptor fighter jets at the 187 already ordered, essentially cutting the extra 60 that were supposed to be purchased.  The F-22 is the most technologically advanced fighter jet today, as it is capable of hovering in place and detecting and killing an enemy from more than 200 miles away.  But these fighter jets cost $354 million each, and in this recession in which the government is spending trillions of dollars, we just cannot afford to make more fighter jets than is completely necessary.  But all is not lost for Lockheed Martin, as Gates’ budget plans included details that will counteract the decrease in spending on the F-22.  Gates said that the government would begin focusing on Lockheed-made F-35 Joint Striker jets, as they are cheaper and more suitable for today’s war environment.

With Obama in charge and an understanding that war has changed in the 21^st century from conventional warfare to more irregular conflicts with enemies that are more unpredictable, defense spending will continue to change.  Gates has made a point in his new budget to move away from equipment used in more conventional wars, such as heavily armored tanks, to weapons that are more fit for defending ourselves against the new-age enemies.  With technologically advanced weapons and jets such as the F-22 and the F-35, Lockheed Martin should continue to be a dominant player in the defense industry. 

Another aspect of today’s economic and political landscape to consider when investing in a defense company is to realize that we are in a recession, and that the government has to make a conscious effort to reign in unnecessary spending like never before.  While the proposed defense budget did increase by 4% this year, many cuts were made to the most expensive projects, and to many of the projects that were deemed as unnecessary or too speculative.  The U.S. Government has made it a point to produce weapons that are necessary for today’s wars, and I believe that this is great news for Lockheed Martin.

In terms of the company’s stock price, I think it was unfairly brought down on speculation that Obama and his team would drastically lower the defense budget.  Now that it is clear that the budget has increased instead of decreased, it seems ridiculous to me that Lockheed Martin shares are still trading 40% below their 52-week highs.  Last time I checked, there is still a lot of conflict in countries like Afghanistan, and the problems in the rest of the Middle East do not seem to be ending anytime soon.  As long as there are wars to be fought, Lockheed Martin’s services will be in high demand.  At these depressed prices, and with continued demand from the government, I believe that Lockheed Martin is a definite buy. 

(Having said this, I will not be investing any money in Lockheed Martin, as I have a moral issue with owning shares of military and weapons companies.  But, if you feel no moral issues with investing in a defense company, then I would highly suggest buying some shares of Lockheed Martin.)

 

Niki Pezeshki

College Trillionaire