Lockheed Martin

Lockheed Martin

Sector Manager: Daniel Curran

Senior Analyst: Kevin McDonnell

Team Analysts:

Jason Flynn

Mike Havris

TJ O’Sullivan

Mark Perham

T r i n i t y S M F

Investment ThesisT R I N I T Y S M F

T R I N I T Y S M F

Summary of Investment Thesis

How does this fit into the SMF’s Portfolio?

Why invest now?

Why invest in this industry?

Why invest in Lockheed Martin?

Stock has fallen with market due to uncertainty, not due to

reduced value proposition.

The aerospace and defense industry has proven relatively

Immune to the impact of oil and gas issues across the world.

Lockheed Martin is the best in class stock in this sector.

it has a long history of success, good long-term growth

prospects, and is available for a reasonable price.

A reduced correlation with oil price is desirable, especially

compared to the other current Industrial holdings

QUALITY

PRICE PRODUCTS

MACRO ENVIRONMENTGROWTH

Company OverviewT R I N I T Y S M F

T R I N I T Y S M F

Introduction: Company Snapshot

Recommendation BUY

Current Price $211.00

Price Target $296.60

Upside 42%

Timeline 2 years

Market Cap. $62.58 B

52wk range $181.91 - $227.91

P/E 18.33

Div. Yield 3.13%

FCF Yield 7%

Analyst Consensus Buy or Hold

Revenue

• Aeronautics

• MST

• MFC

• IS&GS

• Space Systems

Revenue Breakdown

(2014)

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Geographical Breakdown

• Increasing investment in international markets, Lockheed Martin International.

• Steadying off of budget cuts by the US DoD.

Company SWOT Analysis

Strengths

Threats

Opportunities

Weaknesses

• Increasing Department of Defense budget

• Growing international sales – now 21% of total corporate sales, up 6% this year

• Biggest order in 2016 is a THAAD order with Qatar – missile defense program

• Poland’s $3 billion army helicopter deal

• Record backlog of nearly $100 billion. This marks the 5th year in a row of backlog being over $80 billion

• Strong international interest in F-35 program, with clear plans for expansion

• Seems safety and military capabilities trump worries over oil prices

• Reduced demand “in theatre” for Missile and Fire Control products

• Reduced Sikorsky demand

• Drastically lower oil prices• Northrop Grumman + Pentagon• Political pressure

T R I N I T Y S M F

Leidos Deal

LMT will be separating and combining its Information Systems and Global Solutions business segment

with Leidos Holdings Inc. This was done using a method called the Reverse Morris Trust.

What is going to happen?

The old IS&GS section will join with Leidos Holdings, to become the largest government IT and technical

services business. Lockheed Martin shareholders will own 50.5% of the business.

What are the benefits?

The new business will have the extra scale and would become industry leader.

The $5 billion deal includes $1.8 billion in tax-free money for Lockheed Martin, to pay off debt and

repurchase shares.

Finally, it would reduce Lockheed Martin’s share count.

Management

Bruce Tanner,CFO and EVP,

Appointed 2007,

Marillyn A Hewson,CEO, President, ChairmanOver 30 years experince,

Orlando Carvahlo,EVP Aeronautics,

35 with Lockheed,

Rick Edwards,EVP MFC,

Promotion through reshuffle,

Financial OverviewT R I N I T Y S M F

T R I N I T Y S M F

Financials

• Earnings growth at a steady rate and offers impressive dividends• Lockheed’s management effectiveness is evident through impressive ROE• Lockheed have shown impressive cash generation and will look to reward

the shareholder with this

Summary

Total Revenue $46,132M EPS GR 8.76%

EBITDA $5,950m ROE 96.82%

Total Debt/Equity 4.92 Div. Yield 3.13%

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Income Statement

• Organic revenue growth is small but consistent

• EPS growth with an estimated future average growth rate of 8.76%

• Dividends has increased by 47.48% since 2011.There is also a planned special dividends payment of $1.8bn• Will benefit from reinstatement of R&D tax credit

2014A 2015A 2016E 2017E

Revenue $45,600 $46,132 $51,000 $52,530

Operating Income $5,588 $5,436 $5,750 $6325

Operating Margin 12.0% 12.55% 12.72% 13.04%

Diluted EPS 11.21 11.46 11.75 12.97

DPS 5.45 5.75 6.06 6.43

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Balance Sheet & Cash Flow Statement

($000) 2013A 2014A 2015A 2016E

Total Assets 36,188 37,046 49,128 49,872

Total Debt 6,152 6,169 14,305 13888

Total Liabilities 31,270 33,673 46,031 46644

Working Capital 2209 1217 3,097 2294

Shareholders Equity 4,918 3,400 3,096 2228

Cash Flow Operations 4,546 3,866 5100 5355

• Lockheed Martin generated $5.1 billion in cash flow operations for 2015• The Leidos deal provided a onetime payment of 1.8 billion as well as $3.2b to be rewarded to

shareholders• Cash deployment activities have included share buybacks, acquisitions and increasing dividends• Took on $8.4 in debt for Sikorsky deal

T R I N I T Y S M F

Debt Analysis

• Highly levered

• Debt increased considerably over last two quarters

• $9b acquisition of Sikorsky in November '15

• $5b divestiture to Leidos in Jan '16, will receive $1.8b in cash

17%

5%

78%

Capital Structure

Stockholder equity Short term debt Long term debt

Debt Analysis

-

2

4

6

8

10

12

Q1 Q2 Q3 Q4

Net debt to EBIT (2015)

0

2

4

6

8

10

12

14

16

Q1 Q2 Q3 Q4

Interest coverage ratio (2015)

Debt Analysis

• Majority of debt medium-term, relatively spread out

• $1b due in 2016• $750m in 2018• $900m in 2019• $1.25b in 2020

• Just under $4b due within next 5 years, $8.3b within 10

ValuationT R I N I T Y S M F

Competitor Valuations

Name P/E Fwd P/E EPS Gr. 2015

EPS Gr.2016

DivYield

Div. Cover ROE EBITDA(mil.)

Mkt. Cap

YTD. Perf

BAE Systems

19.66 13.56 360% (4.35)% 4.4% 1.38 28.8% 1,659 23.3B 4.92%

NorthropGrumman

19.6 18.42 16.77% 6.36% 1.7% 9.4 26.1% 3,639 32.9B 16.89%

Raytheon 19.14 17.77 16.56% (5.43)% 2.3% 1.8 19.1% 3,526 36.8M 25.15%

LockheedMartin

18.44 17.48 22.78% 0.53% 3.13% 3.58 96.8% 6,425 63.5B 13.04%

T R I N I T Y S M F

Implied Multiples Valuation

Metric Median Industry Value Implied Price

P/E 19.6 224.38

FWD P/E 17.67 213.23

P/B 3.26 33.06

P/S 1.21 181.31

P/CF 14.55 163.30

Average Price 163.06 (-23%)

EV/EBITDA Model

EBITDA: 6425 Low Base High

EV/EBITDA 11.4 15.5 19.4

EV 73046.97 99363.43 124741.1

+ Cash 3103

- Debt 8412

Value of Equity 67737.97 94054.43 119432.1

No. Shares 314.8

Per Share Value (£) 215.18 298.78 379.39

Potential Upside 2% 42% 80%

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Discounted Cash Flow Valuation

2015E 2016E 2017E 2018E 2019E Growth Rate

EBIT 5401 5644.05 5898.03 6045.48 6196.62 4.5-2.5%

Dep & Amor 1024.5 1034.75 1024.4 1014.15 1004.01 1-(1)%

Def. Taxes 1263 1073.55 869.58 686.96 508.35 n/a

Changes WC 603 (1123) (518) (762) (507) n/a

Capital Exp. 855 991.8 1006.68 981.51 976.6 16-(2.5)%

Taxes 1674.31 1749.65 1828.39 1874.1 1920.95 n/a

Total FCF 5762.19 3887.89 4438.94 4128.99 4304.43 n/a

Discounted Cash Flow Valuation

Terminal Growth 1.5% Total Enterprise Value 99363.43

WACC 7% Total Equity Value 94054.43

Estimated Value per share €298.78 (+42%)

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Valuation Weightings

Multiples

10%

Low

20%

Base

35%

High

35%

€296.6 (+41%)

RiskT R I N I T Y S M F

TRINITY SMF

Qualitative Risk

1. Heavy Dependence on the U.S. Government80% of Lockheed Martin’s revenue generated was from U.S. Government contracts which can be highly dependent on congress approval and there may be uncertainty with defensespending moving forward especially with elections in 2016

2. Failure comply with Regulation and LawsThe area of business Lockheed Martin operates in is very regulated and failure to meet regulation and obey laws could adversely affect Lockheed Martin’s reputation and ability to procure large contracts

3. Investment RiskWith Lockheed Martin’s shares trading at 18 times earnings market volatility in 2016 or increase in negative sentiment could negatively affect any investment in the company

4. Currency RiskAlthough only 20% of Lockheed Martin’s revenue comes from foreign markets a strong USD could potentially reduce this revenue stream and further increase Lockheed Martin’s dependence on the U.S. domestic market

TRINITY SMF

Quantitative Risk

Lockheed Northrop Boeing Raytheon3 Year Volatility 1.06% 1.18% 1.37% 1.18%

1 Year Beta 0.45 0.59 0.57 0.47

3 Year Beta 0.36 0.47 0.44 0.40

Expected Return 3 Yr 0.11% 0.14% 0.07% 0.11%

1 Yr Volatility 1.09% 1.29% 1.57% 1.29%

Expected Return 1 Yr 0.03% 0.06% -0.04% 0.05%

Quantitative Risk

Questions