The Razor’s Edge

2-Year Price History

Ockham’s Rating

LMT Stock Evaluation

As discussed in our Recommendation Summary, we have reiterated our Fairly Valued on LMT at this time. There has been a relatively large decline in price over the last week of 18.86%, but there has not been any additional guidance on earnings from LMT. We are specifically looking for more attractive valuations for LMT before we would consider any change to our recommendation. So, while a decrease in price of this magnitude is a step toward a more positive valuation, we have not reached our valuation thresholds yet.

LMT Revenue

As we have often noted, in our valuation methodology, "Cash is King." Well, it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company’s stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, LMT the high and low end of the Price to Sales per share ratios are 0.49x and 0.33x respectively.

Notice that LMT’s current Price to Sales per share ratio is 0.57x, which is high enough compared with historical norms of LMT to cause some concern. The current Price to Sales per share is near the upper end of the historical range. In our eyes, this is a negative factor because it is more likely that it will return to the normal range than continue rising outside of the range. At current sales per share levels, we would need to see a decline in the Price to Sales ratio of 37% merely to return LMT to its historical average.

LMT Cash Earnings

Cash Earnings is always one of the most important factors to review for a company and, more importantly, an investment in a stock. LMT is above their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for LMT, the current level of Cash Earnings compared to its historical levels helps identify where LMT is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 7.15 and a historical low Cash Earnings per share ratio of 4.82, an investor can relate where value becomes optimal.

So, again, with a current Price to Cash Earnings per share ratio of 6.00, LMT is presently above its historical range. Ockham Research is always focused upon the value that investors have placed upon a given metric in the past. In other words, how much would an investor pay for a particular level of Cash Earnings in terms of stock price, and how does that relate to today. Naturally, we utilize proprietary methods to accomplish this, but the basic premise holds true and is simple to understand. For LMT, we are a bit negative on the Cash Earnings level given its higher than historical norm.

LMT Dividends

A strong dividend payment history is looked upon as a favorable characteristic on a company’s future and potentially can receive a positive Ockham rating. That being said, we don’t require dividend payments for company’s whose management has elected to forgo them entirely.

When reviewing dividend yields for LMT, we compare the historic high and low levels over the past, which is similar to our evaluation of Sales and Cash Earnings per share. Paying a dividend is not necessary for any company, but changes in dividend often can lend clues as to the health of the business. A rising dividend is a strong sign for an established company, as it reflects management’s confidence in the company. LMT’s estimated annual dividend is $2.28 resulting in a current dividend yield of 3.61%. The highest dividend yield from LMT over recent history was 3.61% while the lowest dividend yield was 0.62%. If you are looking for some “bang for your buck” then a dividend yield of 70.69% above the historical median should be enticing. LMT receives a positive boost in our view because as you know, equity at its core is simply a claim on future dividends.