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Anand Thandi, Vishal Patel, Kevin Shi, Meghana Pinninti, Ryan Esposito

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Company & Industry Analysis

  • Lockheed Martin is the world’s largest defense contractor
  • Involved in global security and aerospace
  • Operates through four segments: Aeronautics; Missiles and Fire Control ; Rotary and Mission Systems, and Space Systems
  • Serves both the United States and international customers
  • The performance of the companies in the defense industry correlates with the amount of government spending in the military/defense sector.
  • The current Trump administration has increased military spending, which resulted in an uptick in profits for companies such as Lockheed Martin.

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SWOT Analysis

Strengths

Largest Defense Contractor

Strong Research and Development

Diversified in Many Defense Areas

Support of the Government

Weaknesses

Contract Misconduct

Dependence on Government Contracts

Heavily Regulated

Depend on Relatively Scarce Materials

Opportunities

Acquisitions to Further Diversify

Try to Expand International Market

Enter into Cyber Security

Threats

Intense Competition in the Defense Industry

Vulnerable to Cyber Attacks

Could Lose Money During Times of Decreased Fiscal Spending

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Porter’s 5 Forces

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Competition in the Industry

  • Defense industry is an oligopoly
  • Few firms produce expensive and similar products
  • Innovation required to stay ahead of competitors

Potential of New Entrants

Low

  • Immense manufacturing costs
  • High Research and Development costs
  • Extreme government regulations

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Porter’s 5 Forces

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Power of Suppliers

Medium

  • Large number of suppliers
  • Certain suppliers specialize in the dealing of rare materials
    • Titanium, aluminum, and carbon fiber

Power of Customers

High

  • Customers are governments and militaries
  • They determine if Lockheed gets a contract or not
  • They can terminate the contract at any time

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Competitive Analysis

  • Very Diverse Relative to its Competitors
    • Raytheon Specializes in Guided Missile Technology
    • Boeing Specializes in Aerospace and Aerospace Weaponry
  • Its size allows it to more easily gain contracts
    • Do not have to work as much as small companies in order to win contracts
    • They can hire more/better engineers to produce different products or improve existing ones
  • It can just acquire smaller competitors who pose a threat or provide an opportunity for Lockheed Martin
    • Recent example of Boeing acquiring Sikorsky helicopters in 2015 (Manufacturer of the Black Hawk and the Pave Low)

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Revenue Buildout (in millions)

Net Sales

2013

2014

2015

2016

2017 (estimated)

Aeronautics

14,123

14,920

15,570

17,769

20434

Missiles and Fire Control

7,757

7,092

6,770

6,608

6559

Rotary and Mission Systems

7,153

8,732

9,091

13,462

14580

Space Systems

7,958

9,202

9,105

9,409

9368

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Quantitative Aspect

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  • Very Unpredictable Free Cash Flow (Varying greatly)
    • Due to Acquisitions and Capital Expenditures
  • Price to Earnings is Decreasing in the Short Term
    • Earnings is actually increasing, so investors are not paying as much for the stock, so it might have been overvalued in the recent past

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Growth Rate and EPS

  • Growth Rates for 2017 on each sector:
    • Aeronautics - +15%
    • Missiles and Fire Control - Unchanged
    • Rotary and Mission Systems - +8%
    • Space Systems - Unchanged
    • Cost of Sales-8% increase
  • Diluted EPS 2017 estimate: $12.28/share

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Valuation

  • This EPS estimate is lower than last year’s inflated EPS (Money from divestiture) but higher than the previous year’s
  • This definitely shows growth, but due to other factors, we hold off on a positive recommendation.

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Recommendation

  • Hold
  • Varying free cash flow and acquisitions are very risky to the potential investor
  • Solid Company, but going through changes
    • Divestiture of Information systems, acquisitions