Valens Equity Weekly Insights - 2023 11 28
Lockheed Martin (LMT) has a long-term profitability tailwind from its multi-decade long F-35 sales cycle, plus growing demand from the U.S. and allies as the world becomes less safe. Uniform Accounting highlights the company's profitability improvements that the market is missing, indicating equity upside.Lockheed is the largest U.S. defense contractor, and it makes high-value military equipment including missiles and aircraft like HIMARS and F-35s. Over the last several years, as contract tailwinds have picked up, Uniform ROA has gone through a plateau shift from the high teens to the mid-20s. Thanks to continued strong defense spending, this is likely to continue, which the market isn't recognizing.
Lockheed's management team is aligned to focus on margins, turns, and growth, the three components of ROA expansion.
Management confidence in the Q3 earnings call about winning new contracts and its strong relationship with the U.S. military support further ROA expansion and continued growth.
The Walt Disney Company (DIS) (-33%), SS&C (SSNC) (31%), and Qualcomm (QCOMM (-12%) are being removed from the Conviction Long List. Walt Disney is facing continued headwinds from its media businesses, and now its parks business is likely to suffer with recession risk growing. SS&C is seeing pressure as its financial clients are pressured in the current market environment. And Qualcomm has done an excellent job of shifting from the phone market to the IoT world, but with consumers coming under pressure, this end market may also struggle in the coming quarters.
LMT
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.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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