Northrop Grumman Corporation (NOC): Lockheed Martin Corporation (LMT) Stock Is in Dire Need of a Buyback

Faced with the prospects of slowing revenues and declining profits for the foreseeable future, defense contractor Northrop Grumman Corporation (NYSE:NOC) has announced a plan to boost its earnings — by buying back its own stock. But Northrop’s hardly the only defense contractor facing a tough spending environment. And this gets an investor to wondering: Could Lockheed Martin Corporation (NYSE:LMT) stock be next in line for a big buyback?

Where Northrop leads …
Northrop recently upped its planned share repurchase program to $5 billion, effectively assuring investors that even if its earnings as a company should decline, it can still make its earnings per share grow.

How? Well, assume that Northrop earns (hypothetically) $1 million and divides this profit among (still hypothetically) 1 million shares. This results in $1 profit for each Northrop share outstanding. But if you shrink the share count to 750,000 — on the same $1 million firm-wide profit — then each remaining share owns $1.33 of the profits. Presto, change-o — Northrop produces 33% profits growth!

… should Lockheed Martin follow?
This makes sense for Northrop Grumman Corporation (NYSE:NOC), because analysts think that company’s total profits will decline by about 2.6% on average over the next five years. But a 33% boost to per-share earnings could cancel out these declines and even get Northrop growing again.

What’s more, the prospect of a big buyback at Northrop is now bolstering the case for Lockheed Martin Corporation (NYSE:LMT) management to undertake a similar program for Lockheed Martin stock. Why? Well consider: Up until Northrop announced its repurchase program, analysts were looking for earnings at the three big military aerospace firms to look something like this:

But now that analysts have had time to digest news of Northrop’s buyback program, they predict that per-share earnings at the three firms will actually look more like this:

LMT EPS Estimates for Current and Next 3 Fiscal Years data by YCharts

See the difference? In one fell swoop, Northrop’s promise of a big buyback has convinced Wall Street that the company will not just reverse its per-share earnings decline — but actually begin growing again. Boeing (NYSE:BA)‘s earnings are also expected to climb steeply — and that leaves Lockheed Martin Corporation (NYSE:LMT) stock as the odd man out. Of the three big military aerospace firms, it’s currently the only one that analysts now see facing a steep decline in near-term, per-share profits.

Be afraid of Lockheed Martin stock …
It gets worse. Look now at how Lockheed Martin Corporation (NYSE:LMT) stock stacks up relative to the competition on free cash flow yield (that’s the amount of cash profit the company generates, relative to its market cap):

NOC Free Cash Flow Yield data by YCharts