Will Lockheed Martin Stock Recover in 2022?
Shares have struggled lately, but Morningstar’s analyst sees three big opportunities to drive growth.
We think Lockheed Martin’s (LMT) exposure to the F-35 fighter jet program, hypersonic missiles, and the militarization of space gives the company a massive revenue base with long-term growth prospects. The allocation of the defense budget is a political process, which is inherently difficult to predict. Therefore, we favor companies with tangible growth profiles through a steady stream of contract wins, ideally contracts that are fulfilled over decades. Thankfully for defense investors, many programs are procured and sustained over decades. For instance, the F-35, which accounts for about 30% of the company’s revenue, will be sustained through 2070. Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense prime contractors to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry.
Defense prime contractors are implicitly a play on the defense budget, which we think is ultimately a function of a nation’s wealth as well as a nation’s perception of danger. The fiscal stimulus used to support the U.S. economy during the COVID-19 pandemic dramatically increased the national debt, and higher debt levels are usually a forward indicator of fiscal austerity. But we expect a flattening, rather than declining, budgetary environment as we think heightened geopolitical tensions between great powers are likely to buoy spending despite a higher debt burden. We think that contractors will be able to continue growing despite a slowing macro environment, thanks to sizable backlogs and the National Defense Strategy’s increased focus on modernization, and we think that defense budget growth is likely to return to its long-term trend. We note that one of the most common budgetary compromises of the previous decade has been more nondefense spending for more defense spending.
The three biggest stock-specific growth opportunities we see for Lockheed Martin are F-35 sustainment, a large potential contract for the Future Vertical Lift helicopter program, and hypersonic missiles and missile defense programs.
Burkett Huey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.