If you’re under the impression that only big tech stocks rose in 2023, your feelings are correct. The market has been dominated by the explosive returns of the “Magnificent Seven” technology stocks, leaving virtually every other company in the dust.
Late stock this year was Lockheed Martin (NYSE:LMT). The major defense contractor posted a total return of -6% in 2023, compared to a 24.8% rise for the overall sector. S&P500 hint.
Although the threat of war persists in many parts of the world, investors have been unhappy with defense companies such as Lockheed Martin. Its earnings multiple collapsed, giving investors the chance to buy shares at a discount. So is it time to bet on a Lockheed Martin turnaround in 2024 and buy the dip?
Slow but steady growth; strong moat
You won’t get explosive revenue growth from Lockheed Martin. The maker of fighter jets, space equipment and other tools for the U.S. government and its allies operates methodically but has a highly reliable business. With contracts that can span decades, Lockheed Martin’s business is extremely predictable, making it a great choice for investors looking for low-risk investments. The company is rooted in the U.S. military, giving it a broad advantage — or competitive advantage — over other companies trying to win government contracts.
Over the years, as military budgets grew, Lockheed Martin’s revenues grew along with it. Over the past 10 years, turnover has increased by 49%. Only a few periods saw revenue declines.
Thanks to economies of scale, Lockheed’s profit margins increased, causing profits to grow faster than revenues. Over the past 10 years, Lockheed’s operating profit has increased by more than 100%. Not bad for a “heavyweight” defense contractor that is ignored by growth investors.
Constantly return capital to shareholders
In addition to consistent growth, Lockheed Martin has demonstrated excellence in returning capital to shareholders. In practice, this means constant buybacks of its shares and increased dividend distributions. Smart capital return is underestimated by many growth investors, even though it can be very meaningful to stock returns.
Using the same 10-year period described in the section above, Lockheed’s dividend payout increased by 151%. After repurchasing a large portion of its shares from existing shareholders, its outstanding shares decreased by 23%. Add it all up and the company’s earnings per share (EPS) have grown 200% over the last 10 years.
Over the long term, stock prices follow EPS growth. So it’s no surprise to see Lockheed’s total shareholder return of 321% over the last 10 years. But you may be surprised to find that this level of return is higher than the S&P 500 over the same period, which returned 218% to shareholders. Again, not bad for a title that many people seem to forget about.
You can buy the shares today at a low price
The good news for investors is that you can buy Lockheed Martin stock today at a price below the market average. Today, the S&P 500 has an average price-to-earnings ratio (P/E) of 26. Lockheed’s final P/E is 16.5.
Looking at free cash flow, the numbers look similar. Free cash flow is an important metric to consider, alongside profits, because it is the true cash flow a company generates from its products and services. Lockheed Martin is targeting free cash flow of $6.2 billion this year, which would give it a price-to-free cash flow (P/FCF) ratio of 17.5. Again, this is well below the market average.
Add it all up – strong competitive advantages, consistent growth and a reduced P/E – and Lockheed Martin looks like a slam dunk buy for investors in 2024. Buy this sustainable producer and never sell your shares.
Should you invest $1,000 in Lockheed Martin right now?
Before buying Lockheed Martin stock, consider this:
THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Lockheed Martin was not one of them. The 10 selected stocks could produce monster returns in the years to come.
Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor The service has more than tripled the performance of the S&P 500 since 2002*.
*Stock Advisor returns December 11, 2023
Brett Schaefer has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.
This defense giant has lagged the market in 2023: is it time to bet on the stock’s recovery in 2024? was originally published by The Motley Fool
