Over the last few months, companies that both pay dividends and have reliable cash flows have gained interest among investors.
This is particularly true amid the Russia-Ukraine war, higher interest rates, and rising geopolitical tensions.
With tensions globally rising, one sector – defense – is proving popular for those of us looking for reliability.
However, as the earning season gets underway, I noticed that Lockheed Martin Corporation (NYSE: LMT), the world’s largest weapons contractor, posted a less than satisfactory quarter earnings for its first quarter of 2022 (1Q FY2022).
While the aerospace and defense company’s earnings per share came in at US$6.44, ahead of analysts’ average estimate of US$6.21 per share, the Group’s revenues fell 7.7% to US$14.96 billion. That was below analysts’ estimates of US$15.5 billion.
Given the higher expectations of investors amid the ongoing Russia-Ukraine war, some might even consider the results to be disappointing.
This is reflected by the share price performance over the last two months. Back in the middle of February when I first wrote about Lockheed Martin, its share price was still hovering at US$382 level but the share price has since gained by 16.2%.
Following the less-than-satisfactory earnings, I looked at Lockheed Martin’s quarterly earnings and here are the three key takeaways from it.
1. Revenue missed expectations
The main reason for the underperformance of Lockheed Martin’s top line was due to the supply chain challenges and spike in COVID-19 cases.
This is not a surprise as the lower volume in production is seen across many companies in various industries.
Lockheed Martin is no exception and, considering the supply chain challenges and logistics bottlenecks, the results reflect the company’s resilient business model.
It is also worth noting that most of the new demand for its defense programme will not be reflected in the earnings immediately.
As we have seen recently, continued tensions with Russia and China have led to continued expanding defense budgets.
Whether it is developed countries such as the US, UK, the European countries, or rising economic superpowers such as China and India, most have committed to higher defense spending.
The war in Ukraine and geopolitical tensions have emphasised the importance of investment into military power.
While Lockheed Martin has not been able to quantify the impact of these increases, I believe it will lead to a multi-year boost to its earnings given the complexity of defense contracts.
2. Guidance and outlook for 2022 reaffirmed
Management also reaffirmed the guidance and outlook for Lockheed Martin in 2022.
This is in line with my view as the disruptions from the COVID-19 pandemic are likely to taper off as we move into an endemic phase.
While we do not see improved profitability reflected in the outlook for 2022, I think management is taking into account the impact of rising inflation and input costs.
Source: Lockheed Martin’s 1Q FY2022 Earnings Presentation
3. Space business offers upside
Lockheed Martin’s space segment was affected in the near-term by the UK nationalisation of the Atomic Weapons Establishment.
However, the strong demand for its Next Generation Interceptor helped offset the decline in the commercial civil space programmes.
Aside from that, I think Lockheed Martin’s trusted status by the Pentagon and NASA also put the company in a good position to benefit from space exploration.
In 2022, LMT’s guidance for space sales is at around US$11 billion.
Currently, the company is the prime contractor building NASA’s Orion spacecraft, which is designed for long-duration, human deep-space exploration.
It also has a strong track record as Lockheed Martin also built the aeroshell that protected the 2020 Mars spacecraft and rover during their deep space cruise to Mars.
Lockheed Martin’s current financial performance did not reflect much of these new expansions in its space exploration business.
Long-term growth potential and safety
I think Lockheed Martin is in a good position given its long-term growth potential, especially from its space exploration business as well as the multi-year boost from the rise in defense spending by countries around the world.
Aside from that, investors will find Lockheed Martin to be a safe-haven as the Russia-Ukraine war persists.
The uncertainties on the macroeconomic front – with rising inflation and monetary policy normalisation – has also led investors to shift towards value stocks and dividend plays such as Lockheed Martin.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
