Is Lockheed Martin’s Share Buyback Program a Good Deal?

The Presentation inside:

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Is Lockheed Martin’s Share Buyback Program a Good Deal? Is Lockheed Martin’s Latest Share Buyback Program a Good Deal for Shareholders? By Sean O’Reilly

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Buffett on Buybacks “There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds -- cash plus sensible borrowing capacity -- beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.” -- Warren Buffett, 1999 Berkshire Hathaway Chairman’s Letter to Shareholders

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$3 billion announcement No stranger to consistent share repurchases, Lockheed Martin announced an additional $3 billion in authorized share repurchases on Sept. 24, 2015 This is in addition to spending over $9.5 billion on repurchases over the last 5 years

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Historical Results Lockheed generated revenues of $45.6 billion, net income of $3.614 billion, and free cash flow of over $3 billion in FY 2014 The quarter ended June 28, 2015 was decent, with sales coming in at $11.643 billion, up 2.9% over last year Net earnings were up for the quarter 4.5% to $929 million

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Historical Results All of Lockheed’s 5 principal business segments – Aeronautics, Information Systems, Missiles and Fire Control, Mission Systems and Training, and Space Systems – are leaders in their fields and generate strong returns Of particular note is its aeronautics business segment which includes the F-35 Lightning II Joint Strike Fighter Net sales for the F-35 program represented approximately 19% of total consolidated net sales for the six months ended June 28, 2015 Lockheed’s F-35 fighter jet remains the stealth fighter of choice for the U.S. Air Force, England, and numerous other countries

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Sikorsky Aircraft Acquisition In June, Lockheed agreed to acquire Sikorsky Aircraft, a global military and commercial helicopter manufacture and design, for $9 billion in cash from United Technologies Acquisition will be funded through a combination of available cash and debt This acquisition and continued share buybacks can both be funded thanks to balance sheet strength and significant free cash flow generation

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What Would Warren Do? Is Lockheed Martin’s latest share repurchase program a prime example of intelligent capital allocation, or a waste of shareholders’ money?

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LMT’s buyback record is good

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LMT’s buyback record is good LMT has spent approximately $10 billion over the last 5 years buying back stock, much of it at much lower prices than the stock trades for today – particularly in 2011 and 2012 Argument for further buybacks supported by reasonable P/E ratio and exceptional returns on capital

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Best use of shareholders’ capital? LMT currently trades for 17.8x forward EPS according to S&P Capital IQ Earnings per share are expected to grow 9.38% annually through 2019 This compares favorably with the S&P 500 Index’s current P/E ratio of 18.96 Would you want to own LMT at current valuation or the S&P 500?

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Foolish Bottom Line LMT trades at a modest discount to the rest of the market Boasts strong competitive position in all its business segments Generates significant free cash flow every year after capital expenditures and R&D Latest buyback program isn’t as good a deal as in recent years, but seems reasonable in light of taxation of any dividends paid out

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