This Defense Stock Has Bullish Fundamentals AND Technicals
There's reason to believe that Lockheed Martin will trend higher over time with solid fundamentals and bullish chart indicators in its favor.
The defense contractor's 19% year-to-date return has been largely driven by consistent order flow from military customers—and expectations of more to come. This, along with healthy chart traits, propelled the stock to an all-time high of $479.99 this Spring. The market's summer swoon then dragged it below $400, but there have been signs of liftoff in recent weeks.
There's reason to believe that Lockheed Martin will trend higher over time because it has two powerful forces in its favor: 1) solid fundamentals and 2) bullish chart indicators. Let's swoop in.
What Does Lockheed Martin Do?
Lockheed Martin designs and manufactures the aircraft, security systems, and other technologies that keep people safe. Most of the company's business is derived from the U.S. Department of Defense and federal agencies, with its key Sikorsky unit supplying military aircraft to all five U.S. armed forces branches. It also sells its products and services to various international governments and commercial customers. The international side of the business has grown to represent approximately one-fourth of revenue.
Aeronautics is Lockheed Martin's biggest division, having accounted for 40% of the $67 billion in overall revenue generated last year. This is where the aircraft, airlift, and sustainment products are made. It is followed by the Rotary & Mission Systems segment where the Sikorsky business resides, providing helicopters, sensors, undersea systems, and more to militaries. The last two operating units are Space, which sells commercial and government satellites, and Missiles & Fire Control, which includes the PAC-3 defense missiles and the Terminal High Altitude Area Defense (THAAD) system for shorter range ballistic missiles.
Does Lockheed Martin Have Good Fundamentals?
The company has strong financials that are highlighted by a stellar return on equity (ROE) of 62% over the trailing 12 months. The balance sheet has a healthy balance of low-cost debt and equity and liquidity ratios that support a more than adequate ability to meet near-term obligations.
Lockheed Martin's most recent quarterly results were a bit underwhelming. Although the operating margin expanded to 11%, revenue fell 9% with all four segments reporting lower sales. Lower production in the F-25 fighter jet program and a slowdown in sales to Afghanistan were two of the reasons.
Yet there's reason to be optimistic about the long-term due to a whopping $135 billion order backlog that is roughly double what sales were in 2021 and expected to be a reliable cash flow generator for some time. And with Russia-Ukraine, U.S.-China, and other geopolitical tensions on the rise, sales are likely to improve in the quarters ahead.
After a slight dip in earnings this year, the Street is expecting a sharp uptick in profitability in 2023. The current sell-side consensus of $27.94 implies 24% growth over what was a strong 2021 performance. It also means Lockheed shares are trading at 15x next year's earnings, a significant discount to their 22x five-year historical average.
In addition to the growth prospects, one of the most attractive attributes of Lockheed Martin stock is the generous dividend. Approximately 40% of profits are returned to shareholders as cash dividends and the current payout implies a 2.6% forward yield. The board has raised the dividend for 20 consecutive years. Given the steady nature of the cash flow, it is likely to keep approving dividend hikes for the foreseeable future.
What Does Lockheed Martin's Stock Chart Tell Us?
Lockheed Martin's chart outlook is also quite bullish. Last week a triple moving average (MA) crossover occurred involving the 4-day, 9-day, and 18-day MA lines. This suggests that a near term uptrend is underway, as does the stock's triumphant return above the 50-day MA. On August 2nd, the share price regained the key 50-day trend line on a convincing five-day winning streak that featured increasing volume along the way.
Another bullish development relates to the commodity channel index, or CCI, which measures how far price has strayed from its 20-bar average value. The CCI oscillator above the 100 level is considered a bullish event because it implies that the stock is making an unusually aggressive move to the upside that could signify a broader ascent.
From a support and resistance standpoint, the next major test for Lockheed Martin is around $443. This is the long-term, 250-bar resistance level that the stock has struggled to distance itself from. If it can make a high-volume statement move past here, even the best anti-missile systems might not be able to stop it from soaring to a new record high.
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