Don't Be Deceived By Lockheed's Recent Performance

Enumerating several risks faced by Lockheed Martin Corporation LMT, Barclays said the current downtick in shares should be treated with skepticism. The firm also lowered its price target, predicating it on a cut to its 2018 earnings per share estimate.

Barclays lowered its price target to $245 from $250, while retaining its Underweight rating on Lockheed Martin.

Rally Unjustified

Analyst Carter Copeland noted that shares of the defense contractor have outperformed the S&P 500 Index in the past 10 months, although they have come off their high. The analyst noted that shares were cheap on FCF counterpoint, which might appeal to investors in the current yield environment.

However, Barclays sees risk in the company overearning on EPS and cash, from pension. The firm expects Lockheed to earn about $20 in earnings per share in 2020, given expectations that there could be a looming adjustment quarter, resetting estimates, and the pension accounting charges in four years.

Risks Galore

Among the risks to the valuation, is non-cash pension contributing one-third to the total earnings per share. This, according to the firm, would require the pension asset performance remaining strong every year. The firm also thinks FCF growth will remain quite low for several years. In the long-term, Barclays believes F-35 revenue concentration could be an overhang. Additionally, the aggressive and unchanging dividend payout policy also poses risk, the firm said.

Barclays is unsure about revisiting its rating, given the higher-than-average leverage, the ongoing pension and margin risk and additional share loss to rivals Raytheon Company RTN and Northrop Grumman Corporation NOC.