Lockheed Martin Flies Too Close To Sun?

Lockheed Martin Corporation LMT has has be flying high in 2016.  It is up over 21% year to date compared with around 10% for the S&P 500.  Of course, we all know that investing follows The Gumball Rally’s first rule of Italian driving. Roughly paraphrased, it says that it is the future that matters.  LMT was a great investment if you bought it the first of the year, but what about now?

Stifel Nicolaus recently upgraded LMT from a hold to a buy putting a new price target of $290 out on the stock.  As recently as November 14th Barclays, on the news of a Trump victory, upgraded LMT to equal-weight from underweight.  More recently, President-Elect Trump’s Boeing Co BA tweet has raised concerns that the maybe he isn’t just going to open the federal coffers to the military contractors.

As always, we find that a look at the fundamentals helps us to gain perspective on the latest investing flame war.  The question we are trying to ask is what is Lockheed Martin’s value right now.  We know that the stock has gone up significantly over the last year, so we looked at what our models were saying back at the start of the year.  What we saw was that the implied growth rate of residual earnings was just under 2% on January 13th, 2016.  Today it is around 3.25%.  As this implied growth rate increases, that means that the amount of value of a stock that is dependent on future (speculative) growth increases.  So, while the stock price has increased over the year, the amount of future growth required to justify that price has also increased (i.e. the risk has likely increased).

In fact, for a company like Lockheed, a 3.25% implied growth rate is arguably high.  It is a large established company that really shouldn’t be expected to grow residual earnings faster than the GDP growth rate over the long term.

A look at the the value breakdown confirms that large amount of value attributable to future growth.

Give are best estimate of ranges of values for the future earnings and growth give a value distribution with a mean of more like $230.  We recommend that you play with the model yourself.

This first pass at the fundamentals of LMT suggests that the stock is likely overvalued.  If you currently hold it, it may be time to take a good look at it again.  If you don’t hold it, if you are looking for an 8% annual return, it looks like one should be very wary.

As always, this is just a first pass, and we encourage you to dig deeper to form your own opinion.  For my part, I think I smell melting wax…

Charlie currently owns shares in Lockheed Martin, but doesn’t plan on trading any in the next 24 hours as he needs more time to do some more digging to decide what to do.

Morning Monte is “high-level,” and any investment requires a deeper analysis than is presented here. The comments in The Morning Monte are intended to help guide your research and ground you in the fundamentals. In no way should the comments in The Morning Monte be taken as advice to buy or sell a particular equity. Some of the statements are forward looking. As such, these statements are speculation–so beware! The comments represent the views of the author and are not necessarily the views of Morning Monte™ or PRUDENA™.