Over the last two weeks or so, I’ve spent a lot of time looking at the Aerospace and Defense sector. The sector's gain of 30% in 2017 has almost doubled the S&P 500’s return. While I am bullish on the sector, I felt that Raytheon (RTN) and Northrup Grumman (NOC) are overvalued at current levels. I found General Dynamics (GD), on the other hand, to be undervalued. Which camp does Lockheed Martin (LMT), a name my wife and I own in the March to Freedom Fund, fall into? Defense spending by the United States government is expected to be approximately $600 billion next year. As the world’s largest military weapons manufacturer, Lockheed Martin stands to be a major beneficiary of this spending increase. Let’s examine the company’s third quarter earnings report to find out if the stock is trading at an attractive valuation.
LMT reported Q3 earnings numbers on 10/24/2017. Earnings per share were $3.24, a 10% drop from last year’s number. This number also missed analysts’ expectations by 2 cents. EPS were down primarily because the company had a nice gain after taking a controlling stake in the Atomic Weapons Establishment in the United Kingdom last year. Adjusting for this one-time event, earnings per share were down a few pennies on a year over year basis. Revenue came in at $12.17 billion. This was a 5.4% increase from Q2 2016, but still missed estimates by $640 million. Management did mention that the company’s backlog now exceeds $100 billion. Even with the miss on EPS and sales, Lockheed’s management raised their 2017 outlook EPS figure to $12.85-$13.15 from $12.30-$12.60. Revenues expectations were raised to $50 billion - $51.2 billion from $49.9 billion - $51 billion. As you might recall, management had previously raised these figures in the Q2 conference call.
