Space, Acquisitions and Share Buybacks: A Strong Value Play

October 27, 2022
Industrials

Last we wrote about Lockheed Martin, we were touting not only their military exploits but their strong push into space. So why is that important? Space, as a theme, is something that we absolutely love here at Moby. We believe that companies operating in the space economy will be able to massively benefit as more and more funding gets pushed into the sector. So what is our thesis? See more on our thesis below 👇 -> Also feel free to jump past this section to get the full view on why we have and continue to love Lockheed.

 

Thematic Space Thesis:

We are clearly in the middle of the next great wave of exploration. Dating back from the dawn of humanity, humans have always been explorers at heart. However once most of the world was “discovered” and ultimately connected, the world went through an exploration lull up until the last few years. Since then, we’ve seen a massive explosion in companies fighting to access and explore space through different types of endeavors. The amount of money pouring into the space is astronomical: it is estimated to become a $400B sector! And while you see many faces on the news looking to travel to Mars, the Moon and within our own Earth’s orbit, there’s lot more than meets the eye being built behind the scenes. However you slice it, everyone can agree that there is a LOT of companies actively engaging with some future outside of Earth’s atmosphere.

Looking across the space sector today, it can be hard to identify which companies to invest in. Outside of the obvious ones like SpaceX and Virgin Galactic, it can be often be difficult to find the best companies making the proper investments towards the future of the sector. Most of the time, half the companies you read about are already too large and too late to invest into. Furthermore, the other half are often privately held and you’re not able to buy their stock yet. Finding that sweet spot of still unnoticed, but large enough to make a difference (given the capital commitment needed) is a narrow target.

Lockheed Martin is one of those companies that fits nicely within this tight window.

Lockheed Overview:

If you haven’t read on why we’ve liked Lockheed historically, here’s the TLDR:

  • They are the military defense contractors who built the F-22A Raptor, the F-35s and the Hercules planes for the US military. This total output annually amounts to $65.4 billion in revenue last year.
  • The company managed to improve their revenues from all four segments in Q1 2021. While the addition to an increase in their operating profit was not massively different, we believe that the future growth will continue to expand further. When they release their earnings in in October, we’re looking to see that management raises their guidance on this growth. Increased growth targets will directly correlate to higher stock prices.
  • Lockheed is actively investing in the space sector. Winning a massive contract recently with the US government, Lockheed is securing their future, by investing in the sector now. With deep relationships within the US government, Lockheed should be able to secure massive investment over the years to come.

Lockheed Outlook:

While none of this should be relatively new, what is new is what is further affirming our position with Lockheed. And that is that Lockheed’s board just authorized an additional $5B in share buybacks. If you’re not familiar with this concept, this is when a company buys back their shares on the open market, thereby artificially boosting their stock price. Because stock price is largely dependent on financials + shares outstanding – less shares outstanding force the price to go up given the same financial performance. When comparing this to their market cap, we see that this repurchase represents 6% of their outstanding market cap. Therefore a repurchase on this size should have substantial impacts on their price in the market.

We therefore view this share repurchase as a massive tailwind for the company going forward. Pairing this with their high dividend yield, we see Lockheed as a strong investment from a risk/reward perspective.

One thing we want to note however is that Lockheed did not give an update on the timing of this repurchase. While we anticipate more repurchases to come (in addition to the $5B repurchase), we do not yet have visibility into timing. Therefore we believe the market will under-discount the news until timing is announced. Either way, we’re jumping in now ahead of the announcement, in order to participate in the upside once timing is brought to fruition. With underperformance of the company relative to its peers over the course of 2021, we see the yield of the stock, their future in space and share buybacks, boosting the price over the remainder of this year and over all of 2022.

 

Portfolio Strategy:

Lockheed has been a top value pick of ours over the course of this year and we believe the low-point in the price appreciation relative to their peers, represents a strong buying opportunity for the company. We’re continuing to hold onto our position and are raising our price target! If you want a solid stock, with low risk, high dividends and growth potential look no further.

We’re holding this stock as one of our top value plays over the next year!

 


 

Target Price: $475 (35% upside)

Dividend Yield: 3.17%

Target Date: 8-10 Months

Ticker: LMT

Rating: Overweight

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