Lockheed Martin: 3 businesses to take advantage of the growing aerospace and defense market

  • Lockhead Martin shares are up more than 26% year-to-date
  • First quarter revenue was below estimates, but management reiterated outlook for 2022
  • Despite Short-Term Volatility, Long-Term Investors May Consider Investing Now

The global aerospace and defense giant Lockheed Martin (NYSE:) the stock has returned 26.3% since early January. In comparison, Boeing (NYSE:) has lost 23.3% so far this year.

Lockheed Martin weekly chart.

During this time, the is up 4.5% so far in 2022. Understandably, the sector has been in the limelight following the Russian invasion of Ukraine, and many A&D stocks have soared.

Even before the recent military conflict, the outlook for A&D companies was good. Recent Research Highlights:

“The American aerospace and defense sector is one of the largest in the world in terms of infrastructure and manufacturing activities.”

By the end of the decade, the US market is expected to be worth well over $550 billion.

Lockheed Martin released its first quarter financial statements on April 19. While results exceeded estimates, they fell short of expectations. Sales were down 8% to $15 billion year over year.

Net income was $1.7 billion (or $6.44 per share), compared with $1.8 billion (or $6.56 per share) in the year-ago quarter. Cash flow from operations was $1.1 billion, compared to $1.5 billion a year ago.

Regarding the results, CEO James Taiclet said:

Lockheed Martin had a strong start to the year, delivering higher margins and free cash flow above our expectations despite the recent impacts of the COVID outbreak on our operations and supply chain. We remain confident in our outlook for the rest of the year and our growth prospects beyond that. »

Despite these mixed results, the A&D leader reiterated its financial outlook for 2022. As a result, net sales and diluted EPS are expected to be approximately $66 billion and $26.70, respectively.

On March 7, LMT shares broke above $479, hitting an all-time high. However, investors pressed the sell button after the quarterly metrics were released.

Now the stock is changing hands at around $444.98. It pays a quarterly dividend of $2.80 for a yield of 2.5%.

The 52-week range of LMT has been $324.23 to $479.99, while the market capitalization stands at $118.6 billion.

What to expect from Lockheed Martin stock

Among 21 analysts surveyed via invest.comLMT stock has an “outperform” rating.

Consensus estimates from analysts surveyed by Investing.com.
Consensus estimates from analysts surveyed by Investing.com.

Source: Investing.com

Wall Street also has a 12-month median price target of $478.47 for the stock, implying an increase of around 6.7% from current levels. The 12-month price range is between $391 and $539.

However, according to a number of valuation models, such as P/E or P/S multiples or terminal values, the average fair value of LMT stocks is $565.94 at Investing Pro.

Valuation models by InvestingPro.
Valuation models by InvestingPro.

Source: InvestingPro

In other words, the fundamental valuation suggests that stocks could rise by around 26%.

Currently, LMTs The P/E and P/S ratios are 19.3x and 1.8x. Comparable metrics for peers are 21.2x and 1.8x.

We expect Lockheed Martin shares to trade in a wide range and build a base between $430 and $460 in the coming weeks. Thereafter, LMT stocks could potentially start a new stage.

Add LMT stocks to portfolios

Lockheed Martin bulls, who believe the stock’s decline is likely to end, may consider investing now. The target price would be $565.94, or the price predicted by the valuation models.

Alternatively, investors could consider buying an exchange-traded fund (ETF) that holds LMT shares as an asset. Examples include:

  • iShares US Aerospace & Defense ETF (NYSE:)
  • Emles Federal Contractors ETF (NYSE:)
  • Invesco Aerospace & Defense ETF (NYSE:)
  • SPDR S&P Kensho Final Frontiers (NYSE:)
  • SPDR® Industrial Select Fund (NYSE:)

Finally, some LMT bulls might also worry about further declines in the coming weeks. Therefore, they may prefer to constitute a “poor mans covered call” on the stock instead.

So today we are introducing Lockheed Martin Diagonal Debit Spread using LEAPS options, where profit potential and risk are limited.

Investors new to the strategy may want to review our previous articles on LEAPS before reading further.

Most options strategies are not suitable for all retail investors. Therefore, the following discussion of LMT stock is offered for an educational purpose and not as a real strategy for the average retail investor to follow.

Diagonal debit spread on LMT stocks

Pricing at time of writing: $449.20

A trader first buys a longer term call with a lower strike price. At the same time, the trader sells a shorter term call with a higher strike price, creating a long diagonal spread.

So the call options for the underlying stock have different strikes and different expiration dates. The trader takes one option long and shorts the other to make a diagonal spread.

Most traders entering such a strategy would be slightly bullish on the underlying security. Instead of buying 100 shares of LMT, the trader would buy a LEAPS call option deep in the money, where this LEAPS call acts as a substitute” for owning the stock.

For the first step of this strategy, the trader can buy a deep-in-the-money (ITM) LEAPS call, such as the LMT January 19, 2024 350-strike call option. This option is currently offered at $120.90. It would cost the trader $12,090 to own this call option, which expires in less than two years, instead of $44,920 to buy the 100 shares.

The delta of this option is close to 80. Delta indicates the amount of an optionThe price of s should move based on a $1 change in the underlying security.

If LMT stock rises $1 to $450.20, the current option price of $120.90 should rise about 80 cents, based on a delta of 80. However, the actual change could be slightly more or less depending on several other factors that are beyond the scope of this article.

For the second leg of this strategy, the trader sells a short-term slightly out-of-the-money (OTM) call, such as the LMT June 17 450-strike call option. This optionThe current premium is $18.80. The options writer would receive $1,880, excluding trading commissions.

There are two expiration dates in the strategy, which makes it quite difficult to give an exact formula for a breakeven point. Different brokers may offer profit and loss calculators” for such a trading setup.

The maximum potential is realized if the stock price is equal to the strike price of the short call on its expiration date. Thus, the trader wants the LMT stock price to stay as close as possible to the short option’s strike price (i.e. $450) at expiration (June 17), without exceed it.

Here, the maximum return, in theory, would be around $1,730 at a price of $450 at expiration, excluding commissions and trading fees.

However, in practice, it may be higher or lower than this value. There is, for example, the element of time decay which would lower the price of the long option. Meanwhile, changes in volatility could also increase or decrease the option price.

Here, by not initially investing $44,920 in 100 shares of Lockheed Martin, the traderthe potential return is put to use.

Ideally, the trader hopes that the short LMT call will expire out of the money, or worthless. Then the trader can sell one call after another, until the LMT LEAPS long call expires in January 2024.