Is It Time To Get Defensive With Lockheed Martin?

Lockheed Martin Capital Returns Are Worth A Look 

Lockheed Martin (NYSE: LMT) issued weak results and trimmed its full-year outlook causing the stock to drop more than 3.5% in after-hours trading. While the news is lackluster we are viewing the drop in share prices as buying opportunity for dividend investors. The key takeaway for us is that pension-related charges are the culprit in regards to the bottom line weakness and cash from ops remains strong. In this light, the company’s 2.85% dividend yield is only getting bigger and it comes with a positive outlook for distribution growth. When it comes to the share price, we think it’s too soon to call the bottom but we think a bottom is close and it will be a buyable bottom.

"Lockheed Martin continued to deliver strong and consistent cash generation, returning over $1 billion in cash to shareholders in the second quarter through our industry-leading dividend and our ongoing share repurchase program," said Lockheed Martin Chairman, President, and CEO James Taiclet. "Although revenue in the period was affected by supply chain impacts and the timing of customer contract negotiations, our cost management initiatives resulted in margin expansion.

Lockheed Martin Widens Margins 

Lockheed Martin had a difficult quarter with inflation, supply chain issues, and the timing of contract negotiations impacting both the top and bottom lines. Despite these headwinds, the company was able to widen its margins and improve its cash flow which is the salient point for dividend investors. So, the $15.45 billion in net revenue is down 9.3% versus last year and missed the consensus estimate by 350 basis points but the cash flow and more importantly the free cash flow both improved on a YOY basis if ever so slightly. On a segment basis, all operating segments saw a decline in revenue led by a 12.4% decline in Aeronautics and an 11% decline in Space. 

Moving down to the margin, the GAAP operating margin shrank considerably versus last year but this is due to a non-operational charge worth $5.16 per share. When adjusting for this, the company’s earnings came in at $6.32, or down 3% compared to the 9.3% decline in revenue and only 100 basis points shy of the Marketbeat.com consensus estimate. The bad news, however, is in the guidance which was lowered to below the previous guidance and the consensus estimate for both revenue and earnings. The guidance will weigh on share prices in the near term but we think this is the worst of it and capitulation is at hand. 

The Institutions Drive Volatility In Lockheed Martin 

Institutional activity in Lockheed Martin has been mixed over the past year due to rotation within the group. The net of activity over the past 12 months is bearish and selling was vigorous in Q2 but the tide appears to have changed. The institutions were net buyers in Q2 and picked up more than 2% of the pre-release market cap in that time bringing total ownership up to 79%. If the institutions stand firm we see this activity limiting the downside for the stock and aiding the bottom when it begins to form. If not this stock could keep falling but we don’t think so. 

The Technical Outlook: Capitulation In Lockheed Martin 

The price action in Lockheed Martin has been in a downtrend since early spring but the market may have just capitulated. The move has the stock gapping down to a zone where we are expecting to find firm support but the risk is to the downside. Price action is still above the $350 support target that has been in play since late 2020. A move to this level would shave another 5% to 6% off the stock and increase the value and the yield.