Lockheed Martin’s (NYSE:LMT) Big Backlog Can Hold Rising. This is Why
Aerospace & Protection behemoth Lockheed Martin (NYSE: LMT) performs a significant function within the West’s pledge to produce Ukraine with the arsenal it must efficiently defend and reclaim its territory in opposition to the continuing Russian invasion. Lately, you might be continuously listening to on the information that Western allies stay dedicated to supporting Ukraine via this endeavor for “so long as it takes.” This, after all, contains the fixed resupply of ammunition and missiles utilized by HIMARS and different techniques, which have confirmed important for Ukrainians. The result’s Lockheed Martin experiencing an order overflow, which ought to preserve its backlog at file ranges.
I’ve been persistently bullish on Lockheed Martin over the previous couple of years (see my scores beneath) as a result of its a number of qualities and important function within the present geopolitical panorama.
However, with shares now close to an all-time excessive, I imagine there are little to no positive factors to be made as we advance. Accordingly, I’m impartial on the inventory.
Why Lockheed Martin’s Provides are Important for Ukraine
Western Allies have been offering Ukraine with all kinds of navy gear, together with a number of totally different provides produced by Lockheed Martin. These embody Javelin anti-tank missiles, which the Armed Forces of Ukrainian forces have been using efficiently in opposition to Russian armored automobiles, in addition to the corporate’s PAC-3 and THAAD interceptor missiles, counter-battery radars, and guided rocket techniques, all of which have been vital for Ukraine’s counter-offensive efforts.
Probably the most vital provide, nonetheless, which makes all of the distinction for Ukrainians on this unlucky battle, is Lockheed Martin’s HIMARS. With HIMARS’ guided missiles in a position to fireplace as much as a 270km vary, Ukrainians can reduce the Russian provide chains and hit Russian command facilities from afar with excessive precision.
HIMARS has been so efficient for Ukrainians that Lockheed Martin simply received a $431 million contract from the U.S. Military to ship M142 Excessive Mobility Artillery Rocket System launchers at full tempo so as to quickly restock the U.S. and its allies. The U.S. and its allies are then prone to observe via and ship these rockets to Ukraine, leading to one other replenishment contract for Lockheed Martin and so forth. So long as this ongoing battle persists, that is how the chain response will proceed – sadly. With no indicators of the continuing battle decompressing, Lockheed Martin’s future backlog ought to stay at elevated ranges.
What’s This Imply for LMT’s Future Outcomes and Backlog?
It’s vital to know that main protection contractors function on a backlog foundation. The orders accumulate, after which corporations akin to Lockheed Martin begin to ship on this backlog whereas extra orders accumulate. The higher the backlog, the higher the cash-flow visibility, which then reduces dangers relating to Lockheed Martin’s future outcomes. In actual fact, an prolonged backlog permits traders to foretell Lockheed Martin’s medium-term efficiency extra precisely, which is fantastic when it comes to inspiring confidence within the inventory and lessening uncertainty.
The corporate’s most up-to-date Q3 outcomes mirrored its ongoing vital involvement within the West’s dedication to restocking Ukraine. Internet gross sales got here in at $16.6 billion, 3.8% larger year-over-year, as the corporate has been step by step increasing its manufacturing capability to satisfy the underlying order overflow. Be aware that these techniques take a while to supply and require heavy industrial scale. Thus, don’t count on to see double-digit income progress simply because Lockheed Martin is accepting orders at scale. As a substitute, orders accumulate, leading to a rising backlog.
Particularly, Lockheed Martin’s backlog grew practically $5 billion year-over-year by Q3, closing the quarter at an enormous $140 billion. The backlog now contains a 1.3 book-to-bill ratio, which in easy phrases, signifies that Lockheed Martin is presently signing extra order worth than its manufacturing capability can ship. Due to this fact, its revenues over the subsequent 1-1.5 years are primarily assured. All the corporate has to do is ship. That is nice when it comes to enhanced visibility relating to its future financials, going again to my earlier level a few discount in uncertainty linked to the inventory.
Is LMT Inventory a Purchase, In keeping with Analysts?
So far as sentiment amongst Wall Avenue analysts goes, Lockheed Martin has a Maintain consensus ranking primarily based on 4 Buys, seven Holds, and two Sells assigned prior to now three months. At $473.75, the common Lockheed Martin inventory forecast implies 1.55% draw back potential.
The Takeaway: LMT is Probably a Maintain
On this one, I should agree with Wall Avenue analysts and help that Lockheed Martin is certainly a Maintain. With shares up 45% over the previous yr, most positive factors to be made have possible already materialized.
Administration reaffirmed its full-year 2022 EPS outlook, which they count on to land near $21.55. This means the inventory is now buying and selling at a ahead P/E ratio of twenty-two.3x. At greatest, this means Lockheed Martin’s future outcomes are already priced in. If, as a substitute, we’re conservative, then the inventory seems modestly overvalued. The valuation premium is smart contemplating the corporate is presently having fun with implausible tailwinds, but it surely must also trace towards restricted upside potential, shifting ahead.
