Lockheed Martin (NYSE:LMT) – Potentially Undervalued Dividend Payer Outperforming Recession

While the broader market is off to the worst start to the year since 2016, some stocks are outperforming by a solid margin.

Lockheed Martin Company (NYSE:LMT) has been such a business, quietly accumulating change contracts while still trading at an attractive valuation.

Check out our latest analysis for Lockheed Martin

Latest developments

LMT exceeded expectations for F-35 deliveries in 2021, delivering 142 jets to domestic and international customers, 3 more than expected. For 2022, the guided production target is 151 to 153 jets. While the company struck deals with Switzerland and Finland in 2021, the focus is now on Canada, which needs to replace its fighter jet fleet, for a potential $14.8 billion deal.

In addition, the company signed a variety of new agreements and amendments:

  • $847 Million Contract Amendment for F-35 Joint Strike Fighter Aircraft Materials, Parts and Components
  • $492 million contract amendment for logistics support for F-35 Joint Strike Fighter aircraft
  • $324 million contract modification to support calendar year 2022 modification and modernization activities for the F-35 Joint Strike Fighter program
  • $286.4 million modification contract for the Missle Defense Agency
  • $102.4 million contract for the production and delivery of hardware components for the Apache attack helicopter

This is an incomplete list of multi-billion contracts and amendments that the company received over several weeks.

Meanwhile, the U.S. Federal Trade Commission (FTC) has delayed a vote on the acquisition of Aerojet Rocketdyne (NYSE: AJRD), asking for more time to review the $4.4 deal. billions of dollars. LMT CEO Jim Taiclet expects the transaction to close this quarter.

Calculation of intrinsic value

On this occasion, we will use the Discounted Cash Flow (DCF) model. Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.

We use what is called a 2-stage model, which means that we have two different periods of growth rates for the company’s cash flow. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value.

We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.

Generally, we assume that a dollar today is worth more than a dollar in the future, we therefore need to discount the sum of these future cash flows to arrive at an estimate of present value:

Estimated free cash flow (FCF) over 10 years

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leveraged FCF ($, millions) $6.52 billion $6.75 billion $6.86 billion US$6.56 billion US$6.40 billion US$6.34 billion US$6.33 billion US$6.36 billion $6.42 billion $6.50 billion
Growth rate estimate Source Analyst x8 Analyst x8 Analyst x7 Analyst x4 Is @ -2.34% Is @ -1.05% Is @ -0.15% Is at 0.49% Is at 0.93% Is at 1.24%
Present value (millions of dollars) discounted at 6.2% $6,100 $6,000 $5,700 $5,100 $4.7,000 $4,400 $4,100 $3,900 $3.7,000 $3.5,000

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = $47 billion

After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. Similarly, as with the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 6.2%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = $6.5 billion × (1 + 2.0%) ÷ (6.2%–2.0%) = $155 billion

Present value of terminal value (PVTV)= TV / (1 + r)ten= $155 billion ÷ (1 + 6.2%)ten= $85 billion

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is $132 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of US$371, the company seems a little underrated at a 23% discount to the current share price. Remember, though, that this is only a rough estimate, and like any complex formula – trash in, trash out.

NYSE: LMT discounted cash flow January 24, 2022

The hypotheses

We emphasize that the most critical inputs for a discounted cash flow are the discount rate and, of course, the actual cash flows. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of its potential performance.

Since we view Lockheed Martin as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC), which takes debt into account. We used 6.2% in this calculation, which is based on a leveraged beta of 0.975. Beta is a measure of a stock’s volatility relative to the market as a whole.

Look forward:

Over the past few weeks, Lockheed Martin has done much better than the rest of the market. While there is no guarantee this will continue in the future, we should note that based on our valuation model, the company appears to be below intrinsic value. Plus, it pays a solid and affordable dividend and has been steadily rising over the past decade.

However, IIt is impossible to obtain an infallible valuation with a DCF model. Instead, it should be viewed as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. Can we determine why the company is trading at a discount to its intrinsic value?

For Lockheed Martin, we’ve put together three relevant aspects you must assess:

  1. Risks: You should be aware of the 1 warning sign for Lockheed Martin we found out before considering an investment in the business.
  2. Future earnings: How does LMT’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
  3. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of ​​what you might be missing!

PS. Simply Wall St updates its DCF calculation daily for every US stock, so if you want to find the intrinsic value of any other stock, all you have to do is search here.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position at any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials.

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