Lockheed Martin Corporation (LMT): Don’t Get So Defensive…or Maybe You Should

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Lockheed Martin Corporation (NYSE:LMT)Many investors read over the earnings reports of companies that they own, but what some fail to do is search for trends that may carry over on a quarter to quarter basis. Sometimes the company’s small improvements can become significant drivers of future earnings growth almost without investors noticing. It seems that this is the case with Lockheed Martin Corporation (NYSE:LMT), as there are a few things the company keeps doing that should not only improve earnings results, but continue to drive the stock price higher.

A Defensive Play in More Ways Than One

Unless you’ve been living under a rock, pretty much everyone knows that the government is looking to cut defense spending in order to get the budget in line. Companies like Lockheed Martin Corporation (NYSE:LMT), Northrop Grumman Corporation (NYSE:NOC), Raytheon Company (NYSE:RTN), and even The Boeing Company (NYSE:BA), have to adjust their expectations for defense spending over the next several years.

The two ways that investors can play this adjustment are to either look away from the defense sector, or try to find the best value among these companies. For investors looking to diversify away from just defense, The Boeing Company (NYSE:BA) would seem to be the logical choice. The company’s large backlog of airplane orders should provide a level of certainty to the company’s results in the future. For investors willing to stick with a defense-related company, Lockheed Martin appears to offer the best combined value.

In a low interest rate environment like today, it’s hard to argue that Lockheed Martin Corporation (NYSE:LMT)’s current yield of about 4.2% isn’t attractive. While the competition offers yields of roughly 3% at Northrop Grumman Corporation (NYSE:NOC) and 3.25% at Raytheon Company (NYSE:RTN), there’s something to be said about a yield over 4%. In addition, analysts generally expect better growth from Lockheed versus its competition over the next few years.

Lockheed is expected to grow earnings by about 7.3%, compared to 6.15% at Raytheon Company (NYSE:RTN) and a rate of negative 2.6% at Northrop Grumman Corporation (NYSE:NOC). While it’s true that The Boeing Company (NYSE:BA) is expected to increase earnings by nearly 14%, this has more to do with the company’s backlog of airplane orders than anything defense-related. Between Lockheed’s over 4% yield and respectable growth rate, it seems like a fair bet that this company could be a decent defensive play for many investors.

Current Results Versus Future Opportunities

Many investors might not have been very impressed with Lockheed Martin Corporation (NYSE:LMT)’s last earnings report, even though the company increased EPS by 15%. While it’s true that three of the five main business units at the company reported increased sales, some of the divisions that saw sales decreases were also the larger units at the company.

The good news for investors is, though Lockheed had a challenge growing sales, the same cannot be said about their cash flow. In fact, the company reported that their core operating cash flow (net income + depreciation) increased by 10.46%. This cash flow growth was second only to The Boeing Company (NYSE:BA), which reported operating cash flow up 13.79%. Given the huge demand for airlines that is propping up Boeing’s results, this is a somewhat unfair comparison and shows just how efficiently Lockheed’s management is running the business.

Lockheed’s performance looks especially strong compared to its defense category competition where Raytheon Company (NYSE:RTN)reported operating cash flow increased 7.37%, and Northrop Grumman Corporation (NYSE:NOC) actually reported a decrease of 4.31%. This has been an ongoing theme at Lockheed Martin Corporation (NYSE:LMT), and investors should watch to make sure the company can continue growing cash flow even in a weak sales environment.

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