Image: Heath Cajandig
By Brian Nelson, CFA
It was late October 2021 when Lockheed Martin (LMT) took a “big bath” of a third quarter. Back then, Lockheed Martin said it expected 2022 net sales to fall from 2021 levels, to ~$66 billion. At the time, we had been expecting revenue to advance to north of $70 billion during 2022, so the change in trajectory was quite pronounced. Its backlog fell to $134.8 billion from $147.1 billion on a year-over-year basis in the quarter, too. To say that the market was surprised in October would be an understatement because LMT’s stock fell double-digits following the news.
Fast forward a few months, and Lockheed Martin is working to get things back on track (and technically, its chart is starting to look attractive again). The Lockheed story is far from broken, in our view, and geopolitical tensions haven’t been this high in a long time. There’s serious talk that Russia (RSX) may invade Ukraine, some describing it as potentially the “largest invasion since World War II,” if it happens. North Korea continues to launch cruise missiles in what analysts count as the 5th test so far in 2022. Then, if U.S.-China relations deteriorating weren’t enough, there’s growing tensions between China (FXI, MCHI) and Taiwan.
We like having Lockheed Martin in the Dividend Growth Newsletter portfolio, and while its deal with Aerojet Rocketdyne (AJRD) may be blocked by the FTC, it’s not the worst thing that can happen to the defense contractor. Lockheed Martin’s fourth-quarter results, released January 25, showed nice improvements in net sales and net earnings from continuing operations, revealing the firm’s resilient business model. Cash flow from operations of $4.3 billion in the fourth quarter surged over the $1.8 billion mark in the fourth quarter a year ago. The company ended 2021 with $3.6 billion in cash and cash equivalents and $11.7 billion in short- and long-term debt.
Though Lockheed Martin didn’t change its outlook for 2022 on the top line, still calling for ~$66 billion in revenue, the firm remains immensely profitable, expecting to generate $26.70 in diluted earnings per share during the year. Cash flow from operations is expected to exceed $7.9 billion in 2022, and free cash flow is expected to come in greater than $6 billion for the period. Dividends paid during 2021 was $2.9 billion, revealing that the company is on pace for material coverage of dividends with free cash flow for the year.
We think investors should continue to pay close attention to free cash flow trends at Lockheed Martin given political uncertainty, but management’s guidance for 2022 seems to offer incremental clarity relative to the prior update, which factored in a much wider range of outcomes for cash flow from operations given certain provisions in the Tax Cuts and Jobs Act of 2017. We think Lockheed Martin is in much better shape than even a few months ago thanks to this increased guidance clarification. The stock price could continue to grow to reflect this renewed optimism.
Lockheed Martin’s total backlog inched up sequentially, to $135.4 billion, at the end of 2021 relative to $134.8 billion in the third quarter, but it is still down from the $147.1 billion at the end of 2020. Of course, we’d like to see Lockheed Martin’s total backlog continuing to expand on a year-over-year basis, but it still comfortably covers expected 2022 revenue by a factor more than two. Defense orders can be lumpy at times, so we’d only grow concerned about deteriorating backlog trends at Lockheed Martin if revenue coverage approaches 1.25-1.75, where visibility and pricing pressures may become more prominent. We’re not there, and Lockheed’s moaty characteristics indicate those levels may never happen.
Concluding Thoughts
Lockheed Martin is a great play on rising geopolitical uncertainty, and after a “big bath” of a third quarter, the company’s most recently reported fourth-quarter 2021 results, released January 25, offered investors much better greater clarity on free cash flow coverage of its dividend while revealing sequential improvement in its backlog.
Though its deal with Aerojet Rocketdyne may not pass muster with the FTC, we’re okay with that. Lockheed Martin already has a sizable net debt position, and given the recent disappointment in the third quarter of last year, we’re not against management focusing more on righting the ship from an organic basis than trying to push through business combinations that could jeopardize the regained fundamental momentum.
Lockheed Martin remains an idea in the Dividend Growth Newsletter portfolio, yielding ~3% at the moment. The stock could continue to catch favor as geopolitical tensions intensify.
Tickerized for holdings in the ITA.
———-
Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.