Equity Research and Investment Analysis

The contract has not been awarded yet, but these improvements to their long range precision missile products will likely open doors to new business not only in America but in other countries as well. We continue to believe in the direction of this defense contractor as their stock has continued to improve fundamentally, and we are reaffirming our Undervalued stance on LMT shares. Lockheed has been around for a long time and has dealt with shifting defense priorities for a long time.

Apparently in light of recent developments, Cramer has shifted his perspective on Lockheed as of Monday night's show. Although Lockheed beat estimates, Cramer referred to it as a bad quarter and said that Lockheed is suffering from a priority shift at the Pentagon. According to Cramer, Lockheed is saddled with programs that the Pentagon no longer wants, while Northrop Grumman (NOC) has the sort of capabilities that fit the goals that the military is looking to achieve in Iraq and Afghanistan.

There are of course issues inherent to the company, but as of yet we think that the fundamental strength of Lockheed is just too attractive not to make it worthy of serious consideration. This stock has not taken part in the rally even though the fundamentals remain attractive; this is a positive for investors who are looking to deploy some resources into the market. For long term investors, the yield is large enough to allow investors to have patience if it takes the market a little while longer to recognize the value of LMT.

Based on the current fundamentals of Lockheed, such as price-to-cash earnings, price-to-sales, dividends, etc, our methodology suggests a price between $87 and $108 would be an appropriate trading range. Sales have continued to steadily grow in the past and the F-22 is now a very small part of that growth. There are concerns about the government cutting spending on military and defense going forward, but based on what we know now the F-35 looks like it has a bright future.

The hits just keep on coming for Textron, as they announced today that they will be slashing their dividend by 91 percent. As we explain, there is a big difference between a company appearing undervalued and a stock that is a good investment...this is a great example of the difference.