Lockheed Martin Corporation is a global security company that primarily researches, designs, develops, manufactures, and integrates advanced technology products and services in the aerospace and defense fields. While domestic defense spending cuts pose a challenge, increased international demand, particularly from non-NATO countries, is expected to offset declines. Financially, Lockheed Martin has seen steady growth in revenues and net income, though debt levels have also increased to fund contracts, inventory, and acquisitions like Sikorsky Aircraft. Overall the outlook remains positive given Lockheed's portfolio of contracts and technologies.

1. Lockheed Martin Corp (LMT US)
Faisal M. Hamawi
Undergraduate Top-Down Stock Analysis
August 5th, 2016

2. Global
Lockheed Martin Corporation is a global security company that primarily researches,
designs, develops, manufactures, and integrates advanced technology products and services.
The Company businesses span space, telecommunications, electronics, information and
services, aeronautics, energy, and systems integration. Lockheed Martin operates worldwide.
Being an American business with a focus on the aerospace and defense fields Lockheed
is subject to global constraints such as commodity prices, and political and economic conditions.
Such conditions directly impact the company and the industry of industrials. Also businesses in
these industries are highly specialized so market saturation is low, being the high capital
demand and government regulation and security associated.
As a manufacturer of defense systems, missile and fire controls, and military
aeronautics, an important measure of the industry's success is the global risk index. I've
examined the progression of country risk from the period of September 30th 2011 to June 30th
2016. Whereas GDP year-over-year grew at an average of 3.4% annually, so did the
government budgets, defense spending, and international conflicts.

4. A recent report stated “Global armed conflicts becoming more deadly, major study finds”
(The Guardian, IISS ACS) where in 2010 there were 55 active conflicts with fatalities amounting
to 49,000, while in 2014 42 conflicts took place with 180,000 fatalities reported. As an effort,
global powers push to increase military spending, expanding their budgets to combat threats of
such dire nature.
U.S.
Being that the United States government is Lockheed Martin’s largest customer, fiscal
and monetary actions implemented by congress or the president will ultimately affect the firm,
especial regarding the defense budget. In 2011 The Budget Control Act, which called for a
reduction in defense spending of $487 billion over a ten year period, and an additional $500
billion in 2013 over a nine year period through sequestration. However, the impacts of the cuts
are ambiguous, since government agencies may choose to allocate their spending in whichever
way they see fit. (10-K, Pg. 30)
However no western countries, those allied with the United States, and those exposed to
military conflict have increased their spending in the industries revolving around Global Military
Aircrafts and Aerospace Manufacturing, as well as Missile and Fire control, and Mission
Systems and Training. IBISWorld reported an annual increase in defense spending at 2.7% at a
total of $862.4 Billion over the five years working up to 2016, such countries in developing
economies and those in Middle Eastern and Asian countries demonstrated the most growth.
The increased demand by non-NATO countries is expected to increase American
industry revenues at an annual rate of 6.9% to $241.2 billion, this growth will offset the decline
in in Military spending domestically and recover profitability.

5. Industry:
Demand for military aircrafts domestically had witnessed a dramatic decline in
demand as the United States fought to reduce the fiscal deficit by cutting defense
spending. In 2011 The Budget Control Act, which called for a reduction in defense
spending of $487 billion over a ten year period, and an additional $500 billion in 2013
over a nine year period through sequestration will significantly reduce LMT’s future cash
flows. As growth slowed down in recent years, long-term top priority contracts such as
those for the F-35 stealth fighter were generally unaffected.

6. Conversely, international demand boomed as emerging markets continued to
grow, and geopolitical tensions continued to worsen. Non-NATO countries experienced
growth in their defense budgets at an annual rate of 2.7% in the five years to 2016.
Countries such as South Korea, Israel, and Saudi Arabia have realized the most growth.
Lockheed Martin is classified in the Standard and poor's under the Industrials
Segment of the market which is identified as S5INDU (Orange) in the rotation graph
below. We can see from the general movement of the industry that it is moving out of
the weakening state and slowly improving and potentially leading; this can be attributed
to the increased international demand that brings foreign direct investments into the
market.

7. Since the industry is exposed to transaction
risk, and since their products rely on certain rare
earth metals and commodities that are very volatile
in price and demand, Lockheed must leverage their
commodities with long term contracts. As of
December 2015, Lockheed purchased
commodities on the forward markets through long-term contracts, and through
maintained inventory levels did they achieve a degree of flexibility that may adjust for
fluctuations in prices. Relative prices for commodities were not stated in the annual
report, but can be accessed through the Bloomberg terminal below.

8. Lockheed Martin:
Financial Analysis:
On the key adjusted data we see that Lockheed Martin significantly increased their
Market Capitalization through a significant increase in Debt. We can also see steady growth in
revenues and greater growth in net income; gross Profits and Earnings Per Share also had
double digit rate increases in their values.

9. The increases in Liabilities can be attributed to increases in Inventories and current
assets, most of which were financed through Payable and Long-term debt. Though these spikes
may appear alarming at first, further investigations will show these increases are due to
long-term contracted projects with multiple large entities placing big ticket orders of their popular
products. “Sales to foreign military customers rose 10% in 2015, while those in the U.S. fell
2.4%.” (BI Primer), some contacts are as recent as June, “Lockheed Martin Wins $3 Billion
Fighter Jet Order From Denmark” (Bloomberg, Levring 06/09) and some older contacts from
2015 “U.S. Approves $11 Billion Saudi Buy of Lockheed Littoral Ships” (Bloomberg, Capaccio
and McMahon 10/20). And the orders keep on coming.
With the acquisition of Sikorsky Aircraft Systems, Lockheed may expand their Business
operations which may further expand their international sales growth; this can be seen in some
increases in the company's ROIC and ROA, along with some decline in Operating Margins to
come. However, overall outlook is positive and stable relative to their growth and profitability.
Now, most of their revenues can be attributed to their Aeronautics segment of their
operations leading at 33%, but the segment also contributes a share of 44% of their segments

10. capital expenditure, an increase from previous years. However, Lockheed aims to be more cost
effective, if they hope to maintain their advantage over their competition.

11. Earnings and Valuation:
Current Trailing Price to Earning is 21.54, the 12 month forward P/E is expected to
decline to 20.82, this can be attributed to earnings growth in the future; this assumption is valid
due to the estimated Long-term growth rate of 7.16%. The LMT US Equity stock is currently
traded at a price of $256.85 a share; analysts expect the target price to reach $262.18, which is
a fair rate of growth considering the volatile nature of the industry.
Bloomberg Intelligence review states that Lockheed market, operational, and financial
activities are in line, if not excelling in their decisions. In fact, most credit agencies have rated
Lockheed as a stable outlook company with a fair credit rating.
The Firm's 1-years default probability is 0.0225%, relatively low considering the default
rate had been declining since January 2016. Price volatility is at a 16.26% and declining, which
may prove to be a secure stock to hold for the long-run. However their Debt to Equity is greater
than industry average.

12. When examining Lockheed's relative value to other competitors in the industry, we find
their P/E slightly higher than their domestic competition, their Return on Equity is 123.41% a
rate significantly greater than the average and any other competitor. Lockheed does however;
provide a nice Dividend yield of 2.51%
Lockheed's Sales growth is greater than any of their competitors, at a 7.92% annual
growth rate, EPS growth rate (2.34%) is lagging, and Revenue growth is very low compared to
others, but that can be expected from a company with such high capital expenditures. The
Industry slope is slightly positive showing steady long run growth.

13. Lockheed Martin has exceeded earnings expectations almost every quarter historically,
and analyst estimates were in line most of the time.
Cost of Capital:
Lockheed's long-term debt is 16.4% of their market capitalization, and at a cost of 1.5%
which relatively low, however their cost of equity is high (7.5%) which weighs 83.1% bringing
their weighted average cost of capital to a 6.5% much lower than the industries 8.22%. As of
now, their return on invested capital (ROIC) is greater than their WACC, and has been that way
for a while except in the 2015; the dip in 2015 is due to their acquisition of Sikorsky, the Vertical
aircraft company, which is actually proving to be lucrative in its fundamentals.
Their adjusted beta is 0.788 with an R^2 of 0.377, a relatively large spread. Their alpha
is 0.341 signifying a positive outlook relative to the S&P 500.
Dividend Discount Model:

14. The company's dividend Yield is 2.49% with annual dividends of 6.762 per share, a nice
rate compared to competitors, Long term Growth rate is estimated at 7.160% bringing their
theoretical price to $245.607 per share. However if the LT Growth rate was at 7.8% we would
find their theoretical and current price to be equal. But as of now the stock is overvalued.
Lockheed has 227 suppliers for their various segments and 11 major customers,
(excluding Foreign entities with big ticket transactions) of their customers, the United States of
America is their biggest customer contributing 78% of LMTs revenues. They have 25

15. competitors of those; Raytheon Integrated Defense Systems, Northrop Grumman, and Boeing
Military Aircrafts are the largest.
Below, I’ve overlaid the Standard and Poor's 500 indexes over LMT US equity stock, and
from the two year graphic depiction, it is obvious, Lockheed enjoys fewer fluctuations in their
stock price compared to the S&P and their competition.
Price Valuation:
Below we see Lockheed's stock price as a function to different values for Earnings per
Share (EPS), and Price Earnings estimates. Graphically, we see a dramatic climb in LMTs stock
price regardless of growth estimates and expectations, this can be attributed to the fundamental
growth they have been realizing from their activities regarding sales, marketing and
management.

16. Discounted Cash Flow Analysis:
Horizon values for revenues and Free Cash Flows continue to grow at single digit rates,
while EBITDA is expecting margin growth in the double digits annually, so the EBITDA Multiple
methods estimated value per share is $258.49 a 1% upside from the current price of 256.85
meaning it is almost fairly valued. The Perpetuity Growth model estimates the value to reach
$417.93 per share an 63% upside (unless this method is estimating the value in 7.7 years, the
value may be questionable).
Conclusion:
Lockheed Martin Corporation will continue to face strong demand, as global tensions
worsen and as economies grow. The potential upside to owning stock in Lockheed is great, and
as technologies become more advanced, reducing costs and increasing efficiency, Lockheed
Martin could one day reach the moon with its potential.

17. “(Lockheed Martin) won a $3.9 billion NASA contract to build a spacecraft that will return
U.S. astronauts to the moon, beating a Northrop Grumman Corp.-led team.” (Bloomberg,
Lococo, Mclean)

18. Bibliography:
Ferguson, George & Rothchild, Douglas, “F-35, Sikorsky Key Drivers of Lockheed's Revenue
Growth”, (​Bloomberg Intelligence) Bloomberg Terminal, Published 07/22/2016
Ferguson, George & Rothschild, Douglas, “Election, Islamic State Spur Defense Spending:
Midyear Outlook” (​Bloomberg Intelligence) Bloomberg Terminal, Published 06/14/2016
Norton-Taylor, Richard “Global armed conflicts becoming more deadly, Major study finds” ​The
Guardian. Web. Published 05/20/2015
https://www.theguardian.com/world/2015/may/20/armed-conflict-deaths-increase-syr
ia-iraq-afghanistan-yemen​.
Levring, Peter, “Lockheed Martin Wins $3 Billion Fighter Jet Order From Denmark”
Bloomberg.com, Web. 06/09/2016
http://www.bloomberg.com/news/articles/2016-06-09/lockheed-martin-wins-3-billion
-fighter-jet-order-from-denmark
Soshkin, Maksim, “Global Military Aircraft & Aerospace Manufacturing” IBISWorld Industry
Report C2544-GL. IBI​SWorld.com. Web. April 2016
Capaccio, Anthony & McMahon, Madeline “U.S. Approves $11 Billion Saudi Buy of Lockheed
Littoral Ships” ​Bloomberg.com, Web. 10/19/2015
http://www.bloomberg.com/news/articles/2015-10-20/u-s-said-to-approve-saudis-buyi
ng-11-billion-in-littoral-ships
“Lockheed Martin Corp. Annual Report (Form 10-K)” Security and Exchange Commission
(SEC), PDF. 12/31/2015
https://www.sec.gov/Archives/edgar/data/936468/000119312513082873/d428940d10
k.htm