In recent times, Lockheed Martin Corporation (LMT) has been a stock to watch for investors who are looking for reliable returns that ensure steady growth in their portfolio. This aerospace and defence company has been on an uptrend, and many investors are wondering why it has gone up and what the future holds.
A quick glance at the company’s financials reveals that it has been performing reasonably well. The company beat fourth-quarter earnings estimates, with a net profit that’s a remarkable growth rate of 14.2%, a clear indicator that the company is performing well despite being hit by the current economic crisis and defense wars.
So, what are the reasons behind LMT’s success, and why should investors keep buying LMT stock? Here are some of the most bullish factors influencing LMT’s stock.
Expansion of International Markets
One of the key reasons behind LMT’s upward trend is its expanding international market. With the growing demand for defence equipment and technologies worldwide, LMT has leveraged impressive technology to tap into the growing $1.8 trillion global defence market.
The global defence market is expected to grow from $1.8 trillion in 2019 to $2.1 trillion by 2025, at a CAGR of 3.87%, as reported by Zion Market Research. With LMT’s highly advanced defense products, such as the F-35 Lightning II, an advanced multirole fighter jet, the company is well-positioned to tap into this growth potential.
Furthermore, opportunities in the international markets are significant, especially in the Middle East region, where governments are investing massively in state-of-the-art defence equipment. LMT has a significant opportunity to leverage its expertise and capabilities in these markets, which could help drive further growth in the company’s revenue and earnings.
LMT’s financials have been strong, contributing to the steady growth of the company’s stock. The company has reported consistent gross margins, which averaged 12% over the last five years. In addition, the Return on Equity (ROE) is impressive, currently standing at 141.7%.
The company has a debt-to-equity ratio of 5.21, which is higher than the industry average of 0.32. However, the company has the capacity to repay its obligations far into the future, with a current ratio of 1.51. With LMT’s impressive growth rate, the company has the potential to increase its dividend payout in the future, thus making it an ideal stock for income-oriented investors.
Advanced and Innovative Products
LMT has a wide range of innovative and advanced products in its portfolio. It is known for the development of advanced fighter jets and military helicopters, such as the F-35 Lightning II, C-130J Super Hercules, and Apache helicopter. In addition, the company’s space division has been developing cutting-edge products that are geared towards space exploration and commercialization.
The company’s research and development (R&D) costs have been significant, with the R&D expenditure reaching $10505 million in 2020, up from $8801 million in 2016. This focus on innovation and development will ensure that the company has a sustainable competitive advantage, thus positioning it for long-term growth.
Favorable Government Policies
Many countries worldwide have been increasing their defense budgets, presenting a golden opportunity for defence contractors like LMT. The US government is a significant customer for LMT, contributing approximately 70% of the company’s revenue. Therefore, favourable government policies towards defence spending will increase LMT’s top-line revenue and bottom-line earnings.
President Joe Biden’s proposed $773 billion budget for the Defense Department would increase spending on nuclear modernization as well as research and development, while provoking likely opposition in Congress through proposals to cut back on Army troops and retire aging Navy ships and Air Force planes.
The request for the fiscal year starting Oct. 1 represents 4.2% nominal growth or 1.5% real growth after accounting for inflation compared with the $742 billion final appropriation for this fiscal year.
The budget request reflects plans for costly new defense systems — from upgrading the nation’s aging nuclear weapons to developing new hypersonic weapons. There’s a special emphasis on developing new missile warning satellites and protecting those already in orbit.
Under Biden, the Pentagon has stressed retiring older “legacy platforms” to steer operations and maintenance savings into programs like artificial intelligence and space systems that would be more relevant in a conflict with China.
Future Outlook: Positive
LMT’s prospects for growth look good, with the company’s performance in recent years reinforcing its position as a giant in the defence industry. The company has a robust pipeline of products, with many of them in the last stages of development. Additionally, the company is well-positioned to tap into the growing global defence market, which is expected to reach $2.1 trillion by 2025.
The company’s management is committed to consistent growth, evidenced by their investment in research and development, as well as the acquisition of other companies in the defence sector, such as the acquisition of Aerojet Rocketdyne.
Moreover, the company’s dividend payout ratio is sustainable, with the payout ratio currently standing at 31.18%. The company’s free cash flow is also robust, which will facilitate growth and enable the company to increase its payout ratio in the future.
The bottom line
LMT’s stock is likely to continue performing well, driven by the expansion of international markets, strong financials, advanced and innovative products, favorable government policies, and a positive outlook for the future. In this regard, investors looking for a steady, reliable, performance-driven stock to add to their portfolio should strongly consider LMT.