Raytheon vs Lockheed Martin Stock: Which Defense Giant Is Best?

Raytheon vs Lockheed Martin Stock: Uncertainty looms around a lot of businesses these days but one thing is for sure: defense budgets will remain constant or grow. But which defense giant is best?

Raytheon 101

Raytheon Technologies Corporation [NYSE: RTX] is a multinational technology conglomerate specializing in defense and other government markets. The company primarily researches, develops, and manufactures sophisticated weapons, and military and commercial electronics for the US market and world.

It caters to defense, security, and civil markets around the globe. Its advanced technology products in the aerospace and defense industry, include missiles, drones, infrared, radar, avionics, aircraft engines, aero structures, cyber and intelligence, mission support, missiles, military and commercial electronics, air defense systems, and drones.

The company is one of the largest aerospace and defense manufacturers in the world by revenue and market capitalization. It is one of the largest military contractors in the US as well as the world, serving both domestic and international customers, primarily as a prime contractor or subcontractor.

The conglomerate headquartered in Waltham, Massachusetts derives a significant portion of its revenue from the US government, though it has a strong customer base spread across more than 80 countries.

Top products from the defense contractor, which is the world’s largest producer of guided missiles, include Hawk and Patriot ground-based missile systems, and Tomahawk, and Stinger range of offensive missiles among others. 

The Skinny On Lockheed Martin

Lockheed Martin Corporation [NYSE: LMT] is an American global aerospace, defense, security, and advanced technologies company, which engages in the research, design, development, manufacture, integration, and sustainment of advanced technology systems, products, and services.

It is the world’s largest defense contractor and tops the list of US federal government contractors. Lockheed Martin is also a contractor for the US Department of Energy and the National Aeronautics and Space Administration (NASA). It operates through the following business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space.

Its main areas of focus are in defense, space, intelligence, and homeland security. The Company serves both the United States and international customers with products and services that span telecommunications, electronics, defense, space, intelligence, and homeland security.

The North Bethesda, Maryland-based company employs approximately 110,000 people worldwide, operates 375+ facilities with 16,000 active suppliers, including suppliers in every US state and over 50 countries outside the US.

Its well-known products include F-16 Fighting Falcon fighter jets,  F-35 Lightning II Joint Strike Fighters, F-22 fighter jets, PAC-3 defensive missile system, Terminal High Altitude Area Defense (THAAD) air and missile defense programs, the Multiple Launch Rocket System (MLRS), Hellfire, Joint Air-to-Surface Standoff Missile (JASSM), and Javelin tactical missile programs.

Is Lockheed Martin a Buy?

Lockheed Martin Corporation [NYSE: LMT] shares have not been able to keep themselves isolated from the Covid-19-induced volatility, losing more than half of the highly impressive 49% surge it had witnessed in 2019 as demand heated up for its F-35 fighter jets.

Lockheed has clocked average EPS growth of 22% over the past 3 years, while revenue growth averaged 8% over the last 3 years.

The selloff of LMT’s stocks is not something out of the blue as the overall market is in a grip of paranoia, with investors unsure about the magnitude and duration of the pandemic.

On top of that, Lockheed Martin has had to cease production of its top seller F-35 fighter in Japan, and like any other manufacturer is bound to suffer from coronavirus-related disruptions. The company also recently surprised the market by bringing in a new CEO.

However, despite all these impediments, LMT has still a lot going in its favor. The world’s largest pure-play defense contractor on the positive side has a large order backlog and significant long-term contracts.

On top of that, its clientele includes governments and corporate buyers who are unlikely to cut down on their demand despite the threat of looming recession.

LMT reported strong first-quarter results in April. Earnings rose 1.5% to $6.08 per share, an upswing of 1.5%, handsomely beating analyst estimate of a 4% drop in EPS to $5.75. Revenue jumped 9.4% to $15.65 billion, above consensus estimate of $15.23 billion.

However, the coronavirus contagion compelled the defense contractor to cut its revenue outlook from an earlier outlook of $62.75 billion-$64.25 billion in January to $62.25 billion-$64 billion.

Is Lockheed Too Reliant On F-35 Jets?

Lockheed has often been criticized for its over-reliance on F-35 fighter jets. This is not hard to comprehend as the defense contractor derives its maximum revenue from this blockbuster product.

The stealth fighter jet, often considered to be the most advanced in the world, is the most expensive weapons program in Pentagon history, with a mind-boggling procurement price tag of about $428 billion. The company in March was awarded a contract worth $4.7 billion for 78 additional F-35 jets for the US Air Force, Marine Corps, and Navy.

F-35 undoubtedly is Lockheed’s biggest revenue generator, but the company in recent years has tried to move beyond fighter jets.

The company now expects the missiles and fire control unit to be its fastest-growing business, and has shown a lot of promise in that direction.

The Pentagon currently has been prioritizing the development of hypersonic missiles (missiles with capability to travel five times the speed of sound), and Lockheed has emerged as a leading player in this category for developing hypersonic weapons for the US Army. It won a $347 million contract in August to help the Army build new long-range hypersonic weapons.

There have been highly promising developments on other fronts as well. LMT also has a large missile and missile defense business, including its Terminal High Altitude Area Defense (THAAD) air and missile defense system, currently deployed along the Pacific Rim to counter ballistic missile threats from North Korea.

Then there’s Sikorsky, its helicopter-manufacturing arm which is strongly poised to win billions of dollars in contracts from the US army.

Overall, the company sits pretty with a backlog of more than $144 billion, up 10% in the last year. All of this serves as an assurance the wheels will keep turning for LMT despite delayed decision making by government officials working from home, and temporary disruption caused in factories and research centers.

Risks of investing in Lockheed Martin

The F-35 stealth fighter has emerged as the Ace of Spades in Pentagon’s emerging war fighting strategy as it seeks to counter the growing might and aspirations of peer rivals like Russia and China.

But a few ominous clouds are hovering on the horizon as far as its near-term prospects are concerned. Last year, the company announced that F-35 sales could follow the fulfillment of older F-16’s order.

The Pentagon deferred the decision for full rate production to 2021. This could hamper LMT’s earnings and revenue for 2020 and beyond. Additionally, the company is looking for alternative suppliers to compensate for over 900 F-35 parts that Turkey make, after it was kicked out of the F-35 program in 2019 over its decision to buy Russian air defense system.

LMT recently suffered another setback after a report by GOA revealed that the F-35’s $17 billion diagnostic system is rife with flaws, often compelling personnel to spend hours entering data by hand. In addition, “inaccurate or missing data” in the Autonomic Logistics Information System, or ALIS, sometimes result in false alerts that the plane is not ready to fly even when it is.

The setbacks in development and production along with malfunctioning software adds a hint of uncertainty to the world’s costliest weapons system. Still, it all pales in comparison to the whopping cost of sustaining the planes — estimated at about $1.2 trillion over 66 years.

LMT’s another top of the line fighter jet F-16, however, continues to witness a surge in demand across the globe. Last year, Taiwan sanctioned $8 billion to purchase F-16s amidst rising tensions with China. The company also informed that a lot of African, South American, and Southeast Asian countries have shown a keen interest in the F-16.

Meanwhile, simmering tensions in the Mideast, which at all time seems to be sitting on a powder keg, and the Pentagon’s increasing focus on countering Russia and China’s fast-expanding military might and global ambitions, have boosted demand for missiles.

LMT plans to boost production of its Hellfire missile to 11,000 from 7,000. Its PAC-3 missile production is also likely to witness 100% increase in production to carter to increasing customer demand.

However, falling oil prices could prove to be a dampener as it could severely curtail the ability of oil-rich Mideast countries like Saudi Arab to buy hi-tech weapon systems. US oil futures went negative for the first time in history in April and benchmark Brent fell to the lowest price in nearly 20 years. The company though is not unduly worried about the crashing oil prices for now. “Regardless of what’s happening with oil prices… threats continue to accelerate around the world,” outgoing CEO Marillyn Hewson said during the Q1 call.

Bottom Line on Lockheed Martin Stock

Lockheed shares are on the rise again after eroding much of its gain as the Covid-19 pandemic rattled the overall market. Lockheed is part of the strong aerospace/defense group and the demand for its products will continue to surge amidst rising conflicts and escalation around the globe.

The defense contractor recently delivered solid earnings. As mentioned above, Lockheed has emerged as a leading developer of hypersonic weapons. LMT expects its first hypersonic test flights this year; the company also expects its hypersonic weapons sales to jump to $1 billion in 2020 from $600 million it racked up in 2019. The defense contractor has also received hypersonic contracts worth more than $4 billion.

On the civilian side, Lockheed is developing the deep-space Orion spacecraft for NASA, as the Trump administration renews focus on further moon exploration. Also, Amazon CEO and founder Jeff Bezos revealed plans about his Blue Origin space company partnering with Lockheed and other companies to put astronauts on the moon.

But unlike many commercial markets, lost productivity in defense will likely be recaptured because the dollars funding the work have already been appropriated. Even if the U.S. economy ends up in a recession, the government is unlikely to reduce its long-term demand for fighters and missile defense.

Lockheed Martin has been sliding along with the broader market, as the pandemic brings the US and the world on the brink of a recession. But LMT is likely to suffer less as there’s no sign of Pentagon suffering any budget cuts in near future despite the economic slowdown.

Also, the money for the research and production that LMT is undertaking has already been approved and the company is most likely to recapture the lost productivity once the threat of the contagion is over.

The pandemic and plummeting oil price is certain to impact foreign sales, and its impact is likely to weigh on the results of the future quarters. However, experts dismiss chances of any long-term material bearing on fundamentals.

Today Lockheed Martin is trading at under 15 times earnings, with a dividend yield close to 3%. There is no doubt that there’s a lot of uncertainty in the market, but LMT is a world-class operator with a consistent and steady source of revenue stream from the US as well as around the globe with its state-of-the-art defense and space products.

With its advanced missile defense systems, cutting-edge hypersonic capabilities, and state of the art fighter jets, Lockheed Martin remains one of the top stocks in the defense sector.

Should you invest in Raytheon?

Raytheon Technologies [NYSE: RTX] was formed after the merger of Raytheon Company [NYSE: RTX] and United Technologies’ aviation businesses, or specifically, the aerospace business of UTX, Pratt & Whitney, and Collins Aerospace.

The company serves both the military and commercial sectors through its four business segments: Collins Aerospace, Pratt & Whitney, Raytheon Intelligence & Space, and Raytheon Missiles & Defense.

It makes engines for Boeing and its European rival Airbus as well as the Tomahawk cruise and Patriot missile defense system. It also makes radar systems for Lockheed Martin (LMT). The company generated $74 billion in revenue last year.

The merger of Raytheon with United Technologies made perfect sense, the valuation looked attractive and the investors were looking forward to an optimism-filled future.

Everything looked hunky dory till the Covid pandemic emerged as a party pooper. The company had to bear the brunt of slump in airline travel as the restrictions enacted to contain the novel coronavirus pandemic completely rattled the aviation industry.

The decimation of commercial aviation industry is amply demonstrated by slump in stock price of Raytheon and its merger partner UTX, which have underperformed in comparison to its defense peers Lockheed Martin and Northrop Grumman.

Irrespective of the aviation industry tottering on the edge, Raytheon looks like a good value. Raytheon shareholders will get 43% of the new company.

Raytheon’s current market cap of $40.5 billion, and the market values the future Raytheon Technologies to be around $94 billion. Top it with net debt worth of $26 billion and you get an enterprise value (market cap plus net debt), or EV, of $120 billion, which makes Raytheon one of the top defense stocks.

Raytheon Risks

Unfortunately, the earnings assumptions or guidance are being curtailed as the precipitous slide in passenger traffic, which has left the aviation sector bleeding from all pores.

Analysts expect Raytheon earnings to plunge to $1.11 per share, a downside of close to 42%, as revenue falls 1.3% to $18.14 billion.

Wall Street sees Raytheon EPS plummeting over 56% in all of 2020, before making a slight comeback in 2021, rising 13.4%.  Sales are likely to drop 10.6% in 2020 and to increase 4.7% in 2021.

The equation is pretty simple here. No flight operations simply translate into no demand for Collins Aerospace and Pratt & Whitney aircraft engines.

With airlines around the globe taking a bath owing to the Covid contagion, new orders will be nothing short of a bolt from the blue, while cancellations of aircraft orders will be galore—a highly unfortunate scenario for Collins Aerospace, and catastrophic for Pratt & Whitney’s as it extinguishes its plans of generating a long-term income from servicing its airplane engines.

Whitney’s geared turbofan (GTF) engine, competing with CFM International’s LEAP engine on the Airbus A320 NEO, enjoys 40% share, but has won 50% of the orders in the last year.

All the hard work runs the risk of coming undone if the demand for GTF dries up as the airplane orders start to get cancelled.

Also, in January the company warned that Collins Aerospace, its largest unit, would see a decline in its profit owing to the grounding of Boeing 737 Max planes, for which it makes avionics, cabin seating, and lighting. The aerospace giant announced pay cuts and furloughs at Pratt & Whitney and Collins Aerospace on April 14 in response to the losses suffered owing to worsening Covid pandemic.

Raytheon Stock: The Bottom Line

Grounding of Boeing 737 Max and coronavirus headwinds is going to rattle Raytheon Technologies earnings in the near term. It may stabilize after that depending upon how the Covid pandemic pans out and how long it takes the commercial aviation market to find its footings. Few of the following outcomes are possible.

• Governments around the world quickly manage to contain the virus, there is sift global recovery, and commercial air traffic normalizes few months down the line.
• Containment measures take more time than presently anticipated, prolonging the agony of the aviation industry.
• The industry continues to suffer well after the virus is controlled as panicky travelers curtail their traveling.

It is next to impossible to tell which of the scenarios is most likely to play out in the near future. The first, of course is the best, which could help the company make a quick recovery. However, in an event of the third scenario playing out, investors should closely scrutinize the new company’s future earnings prospect.

Also, an important thing to take note of is that Raytheon Intelligence & Space as well as Raytheon Missiles & Defense seems to be pretty much isolated from the disastrous impact of the pandemic. This segment is not seeing pay cuts and furloughed workers as demand remains robust owing to Pentagon making hypersonic weapons its top priority.

China and Russia have already demonstrated their capability in developing hypersonic missiles which fly at five times the speed of sound.  Raytheon also recently bagged a contract worth $10 billion from US Air Force to develop the Long-Range Standoff weapon (LRSO), a next-generation nuclear cruise missile.

All in all, Raytheon’s mix of commercial and defense businesses should help the company offset some of the pain it is currently enduring owing to the sharp slump in air travel. Its hypersonic and advanced missile defense programs are going to provide the much-needed lift in the future, though it cannot be said with certainty about how much they will move the needle for the new company.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.