Final Recommendation

Why Lockheed Martin

Lockheed Martin has been a proven player in the aerospace for some time now. With stable government contracts, dominance in defense innovation, and consistent cash generation, they remain a top player in the defense industry. After analyzing revenue sources, profitability, assets, debt, and cost of capital, it was proven that Lockheed remains healthy on all financial fronts and maintains a strong ability to generate significant cash flows.

Valuation Models

The figure shown below represents the value per share for different valuation models, which were discussed in greater detail in the previous sections. The chosen models to include were free cash flow, ROPI, price to sales, price to cash flow, and price to earning.

Value Estimate Reasoning

Free cash flow

Lockheed consistently generates ample free cash flow, due to long term contracts and porgram strength. This model captures Lockheed's ability to fund assets, R&D, and dividends.

ROPI

Lockheed generates returns above cost of capital, and the ROPI model signifies their strength of revenue generating, operating assets.

Price to Sales

Given the stability and consistency of Lockheed's revenue, the price to sales is a reliable model given the scale of multi-year defense contracts for Lockheed. Additionally, Lockheed has $170B in backlog revenue that has not been recognized, and will further support revenue metrics moving forward.

Price to Cash Flow

This multiple reflects Lockheed's ability to convert earnings into operating revenue, which are essential for funding working capital needs and long term projects. In the defense industry this metric is essential, as cash timing is crucial for projects.

Price to Earnings

Lockheed's price to earnings is representative of their consistent revenue stream, growth in backlog, and consistent defense spending. It is also a reflection of investor confidence in Lockheed's long-term profitability.

Recommendation

Given the previous analysis of free cash flow, and the alternative valuation models, Lockheed Martin is recommended as a Buy candidate. Lockheed has shown consistent growth in earnings, operating income, dividends, net income, all while maintaining costs. Additionally Lockheed continues to lead the defense industry with next generation defense systems, and is projected to continue it's growth in the industry.

Analyst Comparisons

Using Yahoo Finance and FactSet to compare the final valuation, the average price estimate for Lockheed is $520.75 and $523.53 for both Yahoo Finance and FactSet, respectively. While the in house model estimates the value greater than both estimates, buy and hold are the most frequent recommendations on Wall Street.

Yahoo Finance

FactSet

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