Lockheed Martin Corporation (LMT): The 4 Reasons I Own This Stock

When it comes to earnings growth, Lockheed shows the best expected growth rate among its pure defense competitors. In the next five years, analysts expect Lockheed to grow earnings by nearly 8%. Ironically, Raytheon has a forward P/E ratio that is nearly identical to Lockheed, yet analysts are calling for just 5.7% growth at that company. Northrup-Grumman is actually expected to see earnings contraction over the next few years, while Boeing’s EPS is expected to increase by 13.68% on average. The difference between Boeing and the rest is, Boeing will get most of its growth from commercial jet orders, and not from defense revenue.

PEG+Y spells opportunity
I’ve come to realize in the last year or so that not everyone has read Peter Lynch’s two books as many times or as thoroughly as I have. Lynch used a ratio to compare companies that pay dividends called the PEG+Y.

The fascinating part about this ratio is it adds the company’s yield and expected growth to get a total expected return. The company’s total expected return is then divided by the P/E ratio to get the PEG+Y ratio. Since a company with a low P/E and a high total expected return is the goal, the higher the result the better.

Since Lockheed pays a yield of about 4.98% and is expected to grow by 7.9%, the company’s total expected return is 12.88%. With shares selling for a forward P/E ratio of about 10.31, the PEG+Y is 1.25. By comparison, Boeing has a PEG+Y of 1.20. You would think that Boeing’s much higher expected EPS growth would make the stock a better value, but the company’s P/E of 13.30 is nearly 30% higher. Raytheon’s lower yield and growth rate, means the company’s PEG+Y is lower at 0.9. The worst performer is Northrup-Grumman with a PEG+Y of just 0.23.

As you can see, Lockheed offers a better relative value when it comes to yield and growth. The company’s PEG+Y is better than any of their peers, and though their margins are lower today, they can improve in the future. When you add these positive attributes to the fact that the company consistently buys back shares, it’s hard to come up with a defense for why you wouldn’t buy this stock.

The article The 4 Reasons I Own This Stock originally appeared on Fool.com is written by Chad Henage.

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