Edit 1: Extra ARKQ shopping for at present (~50okay shares). Thanks everybody for the constructive suggestions and dialogue!

Backside Line Up Entrance (BLUF) or TL;DR for the non-military sorts:

LMT is an efficient goal if you wish to actually go to the moon, and my PT is $690.26 in two years (greater than 2x from present ranges). Justification and a few potential commerce concepts are listed under, simply CTRL-F “Commerce Concepts”. I hope you guys take pleasure in this work and would respect any dialogue or suggestions. I hope to catch you within the feedback.

Group,

We interrupt at present’s frequently scheduled brief squeeze protection to debate a historically boring inventory, LMT (Lockheed Martin), with vital upside potential. To be clear, that is NOT a brief squeeze goal like many reddit posts are keying on. I hope that this piece sparks dialogue, however if you’re simply in search of brief squeeze content material, all I’ve to say is BUY, HOLD, and GODSPEED.

The supply of inspiration for me scripting this piece is threefold; first, retail buyers are profitable, and I consider that we’ll proceed to win if we proceed to establish alternatives out there. In my opinion, the inventory market has all the time been a spot for the general public to shine a lightweight on areas of innovation that actual Individuals are enthusiastic about and proud to be part of. On-line communities have stolen the loudspeaker from hedge fund managers and returned it to decentralized on-line democracies that rapidly and proudly shift their weight behind concepts they consider in. In GME’s case, it was a blatant smear marketing campaign to destroy a struggling enterprise. I believe that we must always proceed this marketing campaign by figuring out alternatives out there and working with them. It could sound overly idealistic, but when reddit can tackle the hedge funds, I non-ironically consider that we will fairly actually take good firms researching house know-how to the moon. I believe LMT could also be one among a number of shares to assist get us there.

Second, a video the place the Secretary of State of Massachusetts argues that web boards are stuffed with a bunch of unsophisticated, inconsiderate merchants actually ticked me off. This piece is designed to point out that ‘the little man’ is able to get into the weeds, perceive enterprise plans, and outpace analysts that suppose firms like Tesla are overvalued by evaluating them to Toyota. That could be a huge motive that I settled on an previous, giant, sluggish progress firm to do a deep-dive on, and check out my greatest to point out among the abysmal predictive evaluation main ‘analysis corporations’ do on even among the most closely coated shares. LMT is making strikes, and the fits on wall road are 10 steps behind. On the time of scripting this piece, Analyst Estimates vary from 330-460 (what an insane vary).

Third, and most significantly, I’m within the US army, and I believe that it’s enjoyable to go deep into the financials of the protection sector. I believe that it helps me perceive the long-term progress plans of the DoD, and I believe that I assault these deep-dives with a perspective that loads of these finance-from-day-one cats don’t perceive. Even when nobody ever seems at this work, I believe that taking the time to put in writing items like this makes me a greater Soldier, and I’ll proceed to do it in my spare time when I’m feeling impressed. I wrote a bit on Raytheon Applied sciences (Ticker: RTX) 6 months in the past, and I believe it was well-received. I used to be most convicted about RTX within the protection sector, however I’ve since shifted to believing LMT is the chief within the protection house. I’m lengthy each, although. If this conjures up anybody else to do related analysis on different firms, or sparks dialogue in the neighborhood, that’s only a bonus. Particular shout-out to the oldsters that learn extra than simply the TL;DR, however for those who just do learn the TL;DR, I really like you too!

Now allow us to get into it:

Management

I typically prefer to put money into firms which might be led by those who appear to have integrity. Jim Taiclet took the reins at LMT in June of final yr. Whereas on energetic responsibility, he served as a C-141B Starlifter pilot (a retired LMT Plane). After getting out he went to work for the American Tower Company (Ticker: AMT). His first day at American Tower was September 10, 2001. The next day, AMT misplaced 13 workers within the World Commerce Middle assault. He stayed with the corporate, regardless of it being decimated by market uncertainty within the wake of 9/11. He was appointed CEO of the exact same firm in 2004. Over a 16 yr tenure as CEO of AMT the corporate market cap 20x’d. He left his place as CEO of AMT in March of final yr, and the inventory stagnated since his departure, at present buying and selling at roughly the identical market cap as to when he left.

Jim Taiclet was additionally appointed to be the chairman of the board this week, changing the earlier CEO. Why is it related that the CEO got here from an enormous telecommunications firm?

Rightfully, Taiclet’s focus for LMT is bringing army know-how into the fashionable period. He desires LMT to be a primary mover within the army 5G house, army software of AI house, the… house house, and the hypersonic glide automobile (HGV) house. These areas are revolutionary for the boomer protection sector. We are going to focus on this in additional element later once we cowl the corporate’s P/E a number of and why it’s absolute nonsense.

It’s not a shock to me that they introduced Taiclet on in the course of the pandemic. He led AMT via adversity earlier than, and LMT’s positioning in the course of the pandemic is great relative to the remainder of the sector, thanks largely to some sturdy strategic strikes and good investments by present and previous management. I believe that Taiclet is the correct CEO for the job.

Along with the brand new CEO, the brand new Secretary of Protection, Secretary Lloyd Austin, has sturdy ties to the protection sector. He was previously a board member for RTX. He’s completely above reproach, and a real chief of character, however I carry this up to not recommend that he’ll inappropriately serve in the very best curiosity of protection contractors, however to recommend that he speaks the language of those firms successfully. I don’t anticipate that the present administration poses as vital of a threat to the protection sector as many analysts appear to consider. This might be expanded within the headwinds part under.

SPACE

Cathie Wooden and the ARK Make investments staff introduced loads of consideration to the house sector when the ARKX, The ARK House Exploration ETF, Type N-1A was formally filed via the SEC. Extra lately, ARK Make investments revealed their Massive Concepts 2021 Annual Report and devoted a complete 7-page chapter to Orbital Aerospace, a brand new disruptive innovation platform that the ARK Group is investigating. This may increasingly have helped energize wall road to re-look their portfolios and their investments in house know-how, but it surely was definitely not the primary catalyst that pushed the protection trade within the route of profitable the new house race.

In June 2018, then President Trump introduced on the annual Nationwide House Council that “it isn’t sufficient to merely have an American presence in house, we will need to have American dominance in house. So necessary. Subsequently, I’m hereby directing the Division of Protection (DoD) and Pentagon to instantly start the method mandatory to determine a House Drive because the sixth department of the Armed Forces”. Traditionally, Division of Protection house property have been below the management of the Air Drive. By making a separate department of service for the US House Drive (USSF), the DoD would allocate a Chairman of House Operations on the Joint Chiefs of Employees and clearly outline the price range for house operations devoted on to the united states. At current, this price range is funneled from the USAF’s price range. The method was formalized in December of 2019, and the DoD has appropriated ~$15B to the united states of their first full yr of existence based on the FY21 price range.

Among the many 77 spacecraft which might be managed by the united states, 29 of them are Lockheed Martin GPS satellites, 6 of them are Lockheed Martin House-Primarily based Infrared Techniques (SBIRS), and LMT had a hand in creating and/or manufacturing for a number of of the opposite USSF efforts. The Subsequent Technology Overhead Persistent Infrared Missile Warning Satellites (also referred to as Subsequent-Gen OPIR) have been contracted out to each Northrup Grumman (Ticker: NOC) and LMT. LMT’s contract is at present set at $4.9B, NOC’s contract is ready at $2.37B.

Tangentially associated to the dialogue of house is the dialogue of hypersonic glide automobiles (HGVs). HGVs have exoatmospheric and atmospheric implications, however I believe that their know-how is extraordinarily necessary to driving margins down for each house exploration and terrestrial point-to-point journey. LMT is main the cost for army HGV analysis. They maintain contracts with the Navy, Air Drive, and Military to develop HGVs and hypersonic precision fires. The precedence for HGV know-how accelerated considerably when Russia launched their Avangard HGV in December of 2019. Bettering the know-how for HGVs is a essential next-step in sustaining US hegemony, but additionally sustaining management in each terrestrial and exoatmospheric journey.

LARGE SCALE COMBAT OPERATIONS (LSCO)

The DoD transitioning to Massive-Scale Fight Operations (LSCO) because the army’s strategic focus. This can be a transfer away from an emphasis on Counter-Insurgency operations. LSCO requires efficient multi-domain operations (MDO), which implies efficient and built-in methods concerning land, sea, air, house, and our on-line world. To have efficient MDO, the DoD is searching for techniques that each develop capabilities towards peer threats and enhance the power to trace enemy models and talk internally. This requires a modernizing army technique that depends closely on air, missile, and sensor modernization. Put merely, the DoD has determined to begin getting ready for peer or near-peer adversaries (China, Russia, Iran, North Korea) fairly than insurgencies. Because of this, I consider that elevated Chinese language and Russian tensions are, unlucky as it could be, a boon to the protection trade. That is significantly true within the missiles/fires and house trade, as peer-to-peer conflicts are received by leveraging technological benefits.

There are too many tasks to cowl intimately, however some necessary army applied sciences that LMT is specializing in to assist LSCO embrace directed vitality weapons (lasers) to deal with enemy drone know-how, machine studying / synthetic intelligence (most functions fall below LMT’s categorised price range, however it’s straightforward to think about the functions of AI in a army context), and 5G to extend battlefield connectivity. These tasks are all nested inside the DoD’s LSCO technique, and place LMT because the chief in emergent army tech. NOC is the opposite main contractor making a heavy push within the modernization route, however winners win, and I believe a greater CEO, steadiness sheet, and bigger market cap make LMT the clear winner for aiding the DoD in a transition towards LSCO.

SECTOR COMPARISON (BACKLOG)

The dialogue of LSCO transitions properly into the dialogue of protection contractor backlogs. Huge protection contracts usually are not crammed in a single day, so inspecting order backlogs is a comparatively dependable approach to gauge the curiosity of the DoD in a protection contractor’s present or rising merchandise. For my sector comparability, I’m utilizing the highest 6 holdings of the iShares U.S. Aerospace & Protection ETF (Ticker: ITA). I hate this ETF, and ETFs prefer it (DFEN) due to their massively outsized publicity to aerospace, and undersized allocation to firms like LMT. LMT is simply 18% smaller than Boeing (Ticker: BA) however is simply 30.4% of the publicity of BA (18.46% of the fund is BA, solely 5.62% of the fund is LMT). Funds of this class are simply BA / RTX hacks. I recommend constructing your personal pie on a website like M1 Finance (though they’re implicated within the commerce restriction BS… please be suggested of that… hoping different brokerages which might be above board will supply related UIs just like the pie design… simply needed to be clear there) if you’re within the protection sector.

The highest 6 holdings of ITA are:

Boeing Firm (Ticker: BA, MKT CAP $110B) at 18.46%

Raytheon Applied sciences (Ticker: RTX, MKT CAP $101B) at 17.84%

Lockheed Martin (Ticker: LMT, MKT CAP $90B) at 5.62%

Common Dynamics Company (Ticker: GD, MKT CAP $42B) 4.78%

Teledyne Applied sciences Included (Ticker: TDY, MKT CAP $13B) at 4.74%

Northrop Grumman Company (Ticker: NOC, MKT CAP $48B) at 4.64%

As a quick apart, please have a look at the breakdowns of ETFs earlier than shopping for them. The truth that ITA has extra publicity to TDY than NOC and L3Harris is wild. Make sector ETFs balanced the way you need them to be balanced and it is going to be extra participating, and you’ll probably outperform. I digress.

Backlogs for protection firms can simply be pulled from their quarterly studies. Listed below are the present backlogs in the identical order as earlier than, adopted by a share of their backlog to their present market cap. All numbers are pulled from January incomes studies until in any other case famous with an * as a result of they’re nonetheless pending.

Boeing Firm backlog (Industrial: $282B, Protection: $61B, Overseas Navy Gross sales (FMS, categorized by BA as ‘World’): 21B, Complete Backlog 364B): BA’s backlog to market cap is a ratio of three.32, which is robust, however most of that backlog comes from the industrial, not the protection aspect. Airways have been getting decimated, I’m personally not keen on having a lot of my backlog uncovered to industrial pressures when making an attempt to put money into a protection play. With out industrial publicity, their protection solely backlog ratio is .748. That is extraordinarily low. I perceive that this doesn’t do BA justice, however I’m keying in on protection publicity, and I’m left totally unhappy by that ratio. Additionally, we have now seen a number of canceled contracts already on the industrial aspect.

Raytheon Applied sciences backlog (Protection backlog for all Four subdivisions: 67.3B): Raytheon solely revealed a protection backlog on this quarter’s report. That’s additional proof to me that the industrial aerospace aspect of the home is getting hammered. They’ve a comparatively week backlog to market cap as properly, placing them at a ratio of .664, worse off than the BA protection backlog.

Lockheed Martin backlog (Complete Backlog: $147B): This backlog blows our first two protection backlogs out of the water with a present market cap to backlog ratio of 1.63.

Common Dynamics Company backlog (Complete Backlog: $89.5B, $11.6B is primarily enterprise jets, however it’s troublesome to find out how a lot of their aerospace enterprise is industrial): Stable 2.13 ratio, nonetheless nice 1.85 if you don’t contemplate their aerospace enterprise. The curveball right here for me is that GD revealed a consolidated working revenue of $4.1B together with industrial aerospace, whereas LMT revealed a consolidated working revenue of $9.1B. This makes the LMT ratio of revenue/market cap barely in favor of LMT with out accounting for the GD industrial aerospace publicity. This analysis shocked me; I could like GD greater than I initially assumed I might. Nonetheless favor LMT.

Teledyne Applied sciences Included backlog (Discovered within the earnings transcript, $1.7B): This inventory just isn’t fairly in the identical league as the opposite main contractors. That is an odd curveball that loads of the protection ETFs appear to have an excessive amount of publicity to. They’ve a weak backlog, however they’re a smaller rising firm. I’m not on this in any respect. It has a backlog ratio of .129.

Northrop Grumman Company backlog ($81B): Robust numbers right here. I see NOC and LMT as the 2 front-runners within the protection sector. I like LMT extra as a result of I like their publicity to AI, 5G, and HGVs greater than NOC, however I believe this can be a nice different to LMT for those who just like the protection sector. Has a ratio of 1.69, barely edging out LMT on this metric. LMT edges out NOC on margins by ~.9%, although, which has vital implications when contemplating the depth of the LMT backlog.

The winners listed below are LMT, GD, and NOC. BA is engaging for those who suppose anybody will find the money for to purchase new planes. BA and RTX are each getting hammered by industrial aerospace publicity proper now and are way more positioned as restoration performs. That stated, LMT and NOC each generate income now, and can whatever the influence of the pandemic. LMT is rising at a barely quicker fee than NOC. Each are revenue machines, however I like LMT’s product portfolio and management much more.

FREE CASH FLOW

Regardless of the pandemic, LMT had the free money circulation to have the ability to pay a $2.60 per share dividend. This maintains their ~3% yearly dividend fee. That they had a free money circulation of $6.4B. They spent $3.9 of that in share repurchases and dividend payouts. That leaves 40% of that money to proceed to strengthen one of the stalwart steadiness sheets outdoors of massive tech on the road. Having this free money circulation allowed them to buy Aerojet Rocketdyne for $4.4B in December. They appear versatile and keen to develop and make the most of their relative place in the course of the pandemic. This can be a inventory that has little draw back threat and vital upside potential. It’s all the time reassuring to me to know that on the finish of the day, an organization is utilizing its revenue to proceed to develop.

HEADWINDS

New Administration – That is extra of an unknown than a headwind. The Obama Administration was not gentle on army spending, and the newly appointed SecDef is unlikely to shrink back from modernizing the power. Navy protection budgets could get misplaced within the political shuffle, however nothing proper now means that protection budgets are on the chopping block.

Macroeconomic stress – The markets are tumultuous within the wake of GME. Hedgies are shaking of their boots, and scared cash weighed on markets the previous week. If scared cash continues to exert stress on the broader fairness markets, all boomer shares are probably weighed down by slumping markets.

Non-meme Standing – The shares which might be impervious to macroeconomic pressures within the above paragraph are the stonks that we, the folks, have determined to assist. From GME to IPOE, there’s a slew of stonks which might be watching and laughing from the inexperienced zone because the broader markets slip deeper into the crimson zone. Except sentiment about LMT adjustments, I see no proof that LMT will stay unaffected by a broader financial downturn (regardless of displaying progress YoY throughout a pandemic).

TAILWINDS

Aerojet Rocketdyne to the Moon – Cathie Wooden opened up a $39mil place in LMT a number of weeks in the past, and this was close to the announcement of ARKX. The massive concepts 2021 article focuses closely on satellite tv for pc know-how, deep studying, and HGVs. I believe that the AR acquisition means that vertical integration is a precedence for LMT. They even fielded a query of their earnings name about whether or not they have been involved about being perceived as a monopoly. Their reply was spot on—the USFG and DoD have a vested curiosity within the success of protection firms. Why would they discourage a protection contractor from vertical integration to optimize margins?

Worldwide Tensions – SolarWinds has escalated US-Russia tensions. President Biden desires to look robust on China. LSCO is a DoD-wide precedence.

5G.Mil – We nonetheless wouldn’t have loads of constancy on what this seems like, however the army would profit in loads of methods if we had world-wide entry to the speedy switch of encrypted knowledge. Many models nonetheless depend on Vietnam-era know-how sign know-how with abysmal knowledge charges. There are loads of implications if the code may be cracked to win a DoD 5G contract.

TRADE IDEAS

Worth Goal: LMT is at present at a P/E of ~14. Verizon has roughly the identical. LMT’s 5-year P/E ratio common is ~17. NOC is at present at a P/E of ~20. TSLA has a P/E Ratio of 1339 (disappointingly not 1337). P/E is a ineffective metric as a result of nobody appears to care about it. My level is that LMT makes some huge cash, and different firms which might be valued at a lot increased multiples don’t make any cash in any respect. LMT’s P/E ratio is that of a boomer inventory that has no progress potential. LMT’s P/E is precisely according to the Aerospace and Protection Business P/E ratio commonplace. LMT’s new CEO is pushing the trade in a brand new route. I’ll arbitrarily select a P/E ratio of 30, as a result of it’s half of the software program trade common, and it’s a good spherical quantity. Plus, inventory values are speculative and nonsense anyway.

Share worth at present: $321.82

Share worth based mostly on LMT common 5-year P/E: $384.08 (I see this as a brief time period PT, reversion to the imply)

Share worth with a P/E of 30: $690.26

Purchase and Maintain: Easy. Doesn’t take a lot thought. Come again in a yr or two and be joyful together with your tendies (and some dividends besides).

LEAPS Name Debit Unfold (Primarily based on final commerce costs): Purchase $375 C 20 JAN 23 for $26.5, Promote $450 C 20 JAN 23 for $12. Complete Value $14.5 for a diffusion width of $75. Max acquire 517% per unfold. Increased threat technique.

LEAPS: Purchase $500 C 20 JAN 23 for $7.20. Very high-risk strat. If the worth goal is hit inside two years, these could be within the cash $183 per contract for a acquire of 2500%. That is the on line casino strat.

SOURCES

https://www.lockheedmartin.com/en-us/information/options/2020/james-taiclet-from-military-pilot-to-successful-ceo.html

https://www.warren.senate.gov/newsroom/press-releases/in-response-to-senator-warrens-questions-secretary-of-defense-nominee-general-lloyd-austin-commits-to-recusing-himself-from-raytheon-decisions-for-four-years

https://information.lockheedmartin.com/2019-08-30-Lockheed-Martins-Experience-in-Hypersonic-Flight-Wins-New-Military-Work

https://www.lockheedmartin.com/en-us/capabilities/hypersonics.html

https://analysis.ark-invest.com/hubfs/1_Download_Files_ARK-Make investments/White_Papers/ARKpercentE2%80%93Invest_BigIdeas_2021.pdf?hsCtaTracking=4e1a031b-7ed7-4fb2-929c-072267eda5fcpercent7Cee55057a-bc7b-441e-8b96-452ec1efe34c

https://www.deseret.com/2018/6/19/20647309/twitter-reacts-to-trump-s-call-for-a-space-force

https://comptroller.protection.gov/Portals/45/Paperwork/defbudget/fy2021/fy2021_Budget_Request_Overview_Book.pdf

Lockheed Receives Up to $4.9 Billion for Next-Gen OPIR Satellites

Northrop Grumman gets $2.3 billion Space Force contract to develop missile-warning satellites

https://www.lockheedmartin.com/en-us/capabilities/directed-energy/laser-weapon-systems.html

Lockheed Martin’s AI Applications for the Military – An Overview

https://www.defenseone.com/enterprise/2020/07/new-ceo-wants-lockheed-become-5g-player/167072/

https://www.wsj.com/articles/defense-firms-expect-higher-spending-11548783988

https://www.etf.com/ITA#effectivity

https://s2.q4cdn.com/661678649/recordsdata/doc_financials/2020/this autumn/4Q20-Presentation.pdf

https://buyers.rtx.com/static-files/dfd94ff7-4cca-4540-bc4b-4e3ba92fc646

https://buyers.lockheedmartin.com/static-files/64e5aa03-9023-423a-8908-2aae8c7015ac

https://s22.q4cdn.com/891946778/recordsdata/doc_financials/2020/this autumn/GD_4Q20_Earnings_Highlights-Outlook-Remaining.pdf

https://www.idiot.com/earnings/call-transcripts/2021/01/27/teledyne-technologies-inc-tdy-q4-2020-earnings-cal/

https://investor.northropgrumman.com/static-files/6e6e117f-f656-4c68-ba7f-3dc53c2dd13a

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