Raytheon Company (RTN): Is Lockheed Martin Corporation (LMT) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Lockheed Martin Corporation (NYSE:LMT) fit the bill? Let’s look at what its recent results tell us about its potential for future gains.

What we’re looking for

The graphs you’re about to see tell Lockheed Martin Corporation (NYSE:LMT)’s story, and we’ll be grading the quality of that story in several ways:

1). Growth: Are profits, margins, and free cash flow all increasing?
2). Valuation: Is share price growing in line with earnings per share?
3). Opportunities: Is return on equity increasing while debt to equity declines?
4). Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s look at Lockheed Martin Corporation (NYSE:LMT)’s key statistics:

LMT Total Return Price Chart

LMT Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 4.5% Fail
Improving profit margin (4.7%) Fail
Free cash flow growth > Net income growth (29.8%) vs. (0.5%) Fail
Improving EPS 15.3% Pass
Stock growth (+ 15%) < EPS growth 91.4% vs. 15.3% Fail

Source: YCharts.
*Period begins at end of Q2 2010.

LMT Return on Equity Chart

LMT Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 212.6% Pass
Declining debt to equity 558.2% Fail
Dividend growth > 25% 82.5% Pass
Free cash flow payout ratio < 50% 70.4% Fail

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we’re going

Lockheed Martin Corporation (NYSE:LMT) doesn’t come through with flying colors, as it’s mustered only three out of nine possible passing grades. One source of that weakness is its falling free cash flow, which may be inadequate to support current dividend payouts if the trend continues. Investors have rushed toward the perceived safety of defense contracting, but the company hasn’t rewarded anyone with fundamental improvements — its EPS is on the upswing because of share repurchases. Will Lockheed Martin be able to move past these weaknesses and rebound, or is the aerospace giant going to be tarnished for some time to come? A defense contractor lives and dies on the depth of its contracts, so let’s take a look at what Lockheed’s got coming down the pipe.

The U.S. Department of Defense has awarded Lockheed Martin Corporation (NYSE:LMT) with a number of military contracts lately. Lockheed, Raytheon Company (NYSE:RTN), and six other defense contractors obtained a combined $960 million in IT contracts under the U.S. Air Force’s Network-Centric Solutions-2 Application Services program. These contracts will run for three years, with a potential for up to four more “optional” years.

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