Lockheed Martin to Benefit From Increased Defense Spending

Lockheed Martin Corporation (NYSE:LMT) is the largest defense contractor in the world and has dominated the western market for high-end fighter aircraft since 2001. The company engages in the research, design, development and manufacture of weapons, security and aerospace products and services worldwide. The four segments of the company are aeronautics, missiles and fire control, rotary and mission systems and space. Lockheed Martin primarily serves the U.S. government, and therefore, policy decisions are closely tied to the companys prospects.


Increased spending on defense will aid Lockheed Martin

As one of the global superpowers, the U.S. often gets involved in wars around the rest of the world. Toward the end of last year, the U.S. government approved one of the largest defense spending bills in history at a value of $777.7 billion. This gives a direct advantage to the contractors who land more work as part of these massive defense spending bills. With its presence in every U.S. state, Lockheed Martin will undoubtedly land a lot of government contracts as per usual.

The share price of the company has surged 18.15% since the Russian invasion of Ukraine, as this conflict is likely to result in many governments boosting their defense bills. Defense equipment manufactured by Lockheed Martin is already seeing increasing demand as the U.S. and its allies are purchasing this equipment to send to Ukraine. For the next fiscal year, the Biden Administration has proposed an $813.3 billion defense budget, which is even higher than the amount allocated for this year.

F-35 is a growth catalyst

The aeronautics segment of Lockheed Martin focuses on research, design and development of advanced military aircraft and related technologies. In 2021, this segment generated 68% of net revenues.

The F-35 aircraft is a key growth driver for the hugely profitable Aeronautics segment. In the fourth quarter of 2021, the company delivered 52 F-35 aircraft to bring the annual deliveries to 142, and the increasing geopolitical tensions are likely to keep this demand steady in the coming quarters.

Since the program's inception in 2001, the company has delivered 753 F-35 aircraft. There are 230 aircraft in backlog as of the end of last year, and the company expects to deliver 148 to 153 units of the aircraft this year. The production under the program has long-term sustenance given that the government has ambitious inventory targets for F-35 aircraft for the Air Force, Marine Corps and Navy.

The Biden Aministration proposed about $12 billion in procurement funding for the F-35 program through its 2022 defense budget for 48 F-35As for the Air Force, 17 F-35Bs for the Marine Corps and 20 F-35Cs for the Navy and Marines and other modifications. Further, an $11 billion expenditure on 61 F-35 fifth-generation joint strike fighters is allocated out of the fiscal year 2023 defense airpower budget.

Strong international demand

Many nations are strengthening their defense systems, which does not come as a surprise considering recent geopolitical tensions. In 2021, 28% of Lockheed Martins net sales came from the international segment. Its tactical missile and strike missile products are key areas that are experiencing strong international demand.

The company received orders for precision fires systems from Germany and Taiwan and Long-Range Anti-Ship Missiles from Australia. It has been witnessing strong interest from its international customers for its PAC-3 family missiles, with 14 nations, including the U.S., Germany, Kuwait, Japan and Saudi Arabia, choosing PAC-3 Cost Reduction Initiative and PAC-3 Missile Segment Enhancement to strengthen their missile defense capabilities.

Also, Lockheed has been experiencing increased demand for its THAAD missiles, which are designed to protect against high altitude ballistic missile threats, and the demand remains strong among Gulf countries. Recently, Ukraine requested THAAD missiles from the U.S. as well.

Last December, the Israeli Ministry of Defense signed a letter of offer and acceptance to procure 12 CH-53K King Stallion heavy-lift helicopters by paying up to $2 billion.

With nations around the world strengthening their defense spending, Lockheed Martin is likely to see strong demand for many of its products in the coming years, which should translate into attractive revenue and earnings growth.

Valuation and dividend

Lockheed Martin is valued at a forward price-earnings ratio of 17.45, which is well below the five-year average of 22.17. Lockheed Martin is one of the best-performing stocks so far this year, rising more than 32% year-to-date while major indexes have tumbled due to macroeconomic and geopolitical worries. Even on the back of these gains, the company still seems to be valued attractively in the market given that recent policy decisions paint a promising picture for the next five years.

The company pays a quarterly dividend of $2.80 per share as well, which translates to a dividend yield of 2.4% at the current stock price of around $468. Lockheed Martin has increased the annual dividend payout in each of the last 20 years, and this strong track record is likely to remain intact in the foreseeable future.

Takeaway

The U.S. governments decision to boost the defense budget will help Lockheed Martin grow in the next couple of years. The company is also seeing strong demand for the international segment. On a global scale, not many companies can compete with Lockheed Martin, which paves the way for the company to enjoy consistently growing profits. The company seems to be valued fairly in the market in my opinion, but investing in a great company at a fair price is not a bad deal given how expensive stocks are these days.

This article first appeared on GuruFocus.