Lockheed Martin Corp (LMT) stock is up over 12% to $444.17 on Oct. 20 from an Oct. 5 low of $395.54. This is based on the Israeli-Hamas conflict and prospects of a wider Middle East war. Investors may think it's too late to get in, but LMT stock could still be considered cheap.
One thing is for sure. Lockheed Martin is a solid company based on its recent Oct. 17 release of Q3 earnings. Moreover, LMT stock does not appear expensive even after its recent jump.
For example, Lockheed recently raised its quarterly dividend by 5% to $3.15 per share, putting the stock on a solid 2.84% dividend yield. Moreover, the company has a solid 20-year track record of annually hiking its dividend.
Moreover, analysts project the company will make $26.57 in earnings per share (EPS) this year, which covers the annual $12.60 per share dividend by over 2 times. In addition, EPS forecasts are for $26.72 next year, which puts LMT stock on a forward price-to-earnings (P/E) multiple of just 16.6x.
That is well below the forward 17.7x multiple for the S&P 500 based on analysts' forecasts, according to FactSet. In addition, Morningstar reports that Lockheed's historical average forward multiple is 18.3x, although the forward multiple average is 15.5x.
Impressive Free Cash Flow Leads to a Higher Price Target
Lockheed provided significant guidance for its free cash flow (FCF) during its latest earnings call. The company reported $2.5 billion in FCF for Q3 which was slightly lower than the $2.7 billion last year. But this was due to small timing and inventory change variances.
Moreover, management said it still expects to generate $6.2 billion in FCF for 2023. That represents an FCF margin of 9.3% based on the middle of its own estimates of $66.25b to $66.75 billion in revenue.
Moreover, the free cash flow will be used to reward shareholders through dividends and buybacks. Last quarter, for example, 100% of the $2.5 billion in FCF was used to pay $747 million in dividends and $1.75 billion in share repurchases.
That means that if this continues the company will buy back $7 billion of its shares annually. This works out to a buy-back yield of 6.25% since its market cap is $111.96 billion (i.e., $7b/$111.96b).
Moreover, this also gives investors a clear price target. For example, using a 5.5% FCF yield, the stock could eventually reach $127.3 billion (i.e., $7b/0.055 = $127.3b).
That represents a potential upside of 13.7% from here, giving investors a price target of over $500 per share (i.e., $444.17 x 1.1366=$504.84 per share). Moreover, using a 5.0% FCF yield, the stock could rise 25% to over $555 per share as its market cap would be $140 billion (i.e., $7b/0.05).
Where This Leaves Investors LMT Stock
The bottom line here is that LMT stock is very cheap, both compared to the S&P, and its own history. In addition, as investors appreciate the solid nature of its free cash flow generation, war prospects or not, they are likely to give it a more attractive FCF yield valuation.
Given that the company is solidly shareholder friendly as seen by its dividend and buyback policy, there is every reason to believe LMT stock could be undervalued.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
