Morningstar | We Assign Lockheed Martin a $328 Fair Value Estimate
We assign Lockheed Martin a wide economic moat and a $328 fair value estimate. The F-35 remains the single largest program driving our valuation of Lockheed, and we forecast it will contribute over one quarter of the company's consolidated operating profit by 2023. Total F-35 quantities are projected at just over 2,400 for the U.S., versus an original baseline of about 2,800. At the end of 2018, Lockheed had delivered over 350 F-35s. Buys may be stretched out over the next decade, as the Department of Defense attempts to contain annual outlays for the program, but we don't think large cuts in total F-35 production will occur. By 2020, we project the F-35 will account for 31.5% of total revenue.Rotary & mission systems will account for roughly one quarter of 2019 sales; this segment focuses on combat ships and naval electronics, and the 2015 acquisition of Sikorsky expands this business into helicopters. We believe Sikorsky will continue to face headwinds in its commercial business, but the transition to production on military programs in 2020 and beyond should boost growth.
The remaining two segments, missiles & fire control and space systems, constitute just over 30% of sales. Missiles & fire control is benefiting from Department of Defense investments in missiles and will be the fastest growing unit through 2021. We like Lockheed’s portfolio of franchise programs, combined with its solid management team that continues to focus on returning excess cash to shareholders. We believe U.S. defense outlays, which lag the budget, will continue to grow over the next few years and that wide-moat Lockheed is well positioned to capture this upcycle.
Lockheed Martin is a security and aerospace company. The company has four segments: Aeronautics, which is engaged in the research, design, development, manufacture, integration, sustainment, support and upgrade of military aircraft; Missiles and Fire Control, which provides air and missile defense systems, logistics, fire control systems, and mission operations support; Rotary and Mission Systems, which provides design, manufacture, service and support for military and commercial helicopters, radar systems, and simulation and training services; Space, which researches, designs, develops, engineers and produces satellites, space transportation systems, and strategic, strike, and defensive systems.
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