Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Lockheed Martin: 3 Trades To Leverage Growth In Aerospace And Defense Market

By Investing.com (Tezcan Gecgil/Investing.com )Stock MarketsApr 28, 2022 08:42AM ET
www.investing.com/analysis/lockheed-martin-3-trades-to-leverage-growth-in-aerospace-and-defense-market-200623038
Lockheed Martin: 3 Trades To Leverage Growth In Aerospace And Defense Market
By Investing.com (Tezcan Gecgil/Investing.com )   |  Apr 28, 2022 08:42AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
  • Lockhead Martin shares are up more than 26% since the beginning of the year
  • Q1 top line was short of estimates, but management reiterated 2022 outlook
  • Despite short-run volatility, long-term investors could consider investing now

Global aerospace and defense behemoth Lockheed Martin (NYSE:LMT) stock has returned 26.3% since the beginning of January. For comparison, Boeing (NYSE:BA) has lost 23.3% so far this year.

Lockheed Martin Weekly Chart.
Lockheed Martin Weekly Chart.

Meanwhile, the Dow Jones US Select Aerospace & Defense is up 4.5% so far in 2022. Understandably, the sector has been in the limelight following the Russian invasion of Ukraine, and many A&D stocks have skyrocketed.

Even before the recent military conflict, the outlook for A&D companies had been strong. Recent research highlights:

“The US aerospace and defense sector is one of the largest, globally, in terms of infrastructure and manufacturing activities.”

By the end of the decade, the US market is expected to be worth well over $550 billion.

Lockheed Martin issued Q1 financials on Apr. 19. While the bottom line beat estimates, revenue came in short of expectations. Sales decreased 8% to $15 billion year-over-year.

Net earnings came in at $1.7 billion (or $6.44 per share), down from $1.8 billion (or $6.56 per share) in the prior-year quarter. Cash from operations stood at $1.1 billion compared with $1.5 billion a year ago.

On the results, CEO James Taiclet said:

Lockheed Martin had a solid start to the year by delivering margin expansion and free cash flow above our expectations despite recent COVID-surge impacts on our operations and supply chain. We remain confident in our guidance for the remainder of the year and our growth outlook beyond.”

Despite these mixed results, the A&D leader reiterated its 2022 financial outlook. Accordingly, net sales and diluted EPS are forecast to come around $66 billion and $26.70, respectively.

On Mar. 7, LMT shares went over $479, reaching a record high. However, investors hit the sell button after the release of the quarterly metrics.

Now, the stock is changing hands at around $444.98. It pays a quarterly dividend of $2.80 for a yield of 2.5%.

LMT's 52-week range has been $324.23–$479.99, while the market capitalization stands at $118.6 billion.

What To Expect From Lockheed Martin Stock

Among 21 analysts polled via Investing.com, LMT stock has an "outperform" rating.

Consensus Estimates of Analysts Polled By Investing.com.
Consensus Estimates of Analysts Polled By Investing.com.

Source: Investing.com

Wall Street also has a 12-month median price target of $478.47 for the stock, implying an increase of around 6.7% from current levels. The 12-month price range is between $391 and $539.

However, according to a number of valuation models, such as P/E or P/S multiples or terminal values, the average fair value for LMT stock stands is $565.94 at InvestingPro.

Valuation Models By InvestingPro.
Valuation Models By InvestingPro.

Source: InvestingPro

In other words, fundamental valuation suggests shares could increase around 26%.

At present, LMTs P/E and P/S ratios are 19.3x and 1.8x. Comparable metrics for peers stand at 21.2x and 1.8x.

Our expectation is for Lockheed Martin stock to trade in a wide range and build a base between $430 and $460 in the coming weeks. Afterwards, LMT shares could potentially start a new leg up.

Adding LMT Stock To Portfolios

Lockheed Martin bulls, who believe the decline in the stock is likely to come to an end, could consider investing now. The target price would be $565.94, or the price forecast by valuation models.

Alternatively, investors could consider buying an exchange-traded fund (ETF) that has LMT stock as a holding. Examples include:

  • iShares US Aerospace & Defense ETF (NYSE:ITA)
  • Emles Federal Contractors ETF (NYSE:FEDX)
  • Invesco Aerospace & Defense ETF (NYSE:PPA)
  • SPDR S&P Kensho Final Frontiers (NYSE:ROKT)
  • Industrial Select Sector SPDR® Fund (NYSE:XLI)

Finally, some LMT bulls could also be nervous about further declines in the coming weeks. Therefore, they might prefer to put together a "poor mans covered call" on the stock instead.

So, today, we introduce a diagonal debit spread on Lockheed Martin by using LEAPS options, where both the profit potential and the risk are limited.

Investors who are new to the strategy might want to revisit our previous posts on LEAPS before reading further.

Most option strategies are not suitable for all retail investors. Therefore, the following discussion on LMT stock is offered for educational purposes and not as an actual strategy to be followed by the average retail investor.

Diagonal Debit Spread On LMT Stock

Price at time of writing: $449.20

A trader first buys a longer term call with a lower strike price. At the same time, the trader sells a shorter term call with a higher strike price, creating a long diagonal spread.

Thus, the call options for the underlying stock have different strikes and different expiration dates. The trader goes long one option and shorts the other to make a diagonal spread.

Most traders entering such a strategy would be mildly bullish on the underlying security. Instead of buying 100 shares of LMT, the trader would purchase a deep in the money LEAPS call option, where that LEAPS call acts as a surrogate” for owning the stock.

For the first leg of this strategy, the trader might buy a deep in the money (ITM) LEAPS call, like the LMT 19 Jan. 2024 350-strike call option. This option is currently offered at $120.90. It would cost the trader $12,090 to own this call option, which expires in less than two years, instead of $44,920 to buy the 100 shares outright.

The delta of this option is close to 80. Delta shows the amount an options price is expected to move based on a $1 change in the underlying security.

If LMT stock goes up $1 to $450.20, the current option price of $120.90 would be expected to increase by approximately 80 cents, based on a delta of 80. However, the actual change might be slightly more or less depending on several other factors that are beyond the scope of this article.

For the second leg of this strategy, the trader sells a slightly out of the money (OTM) short-term call, like the LMT June 17 450-strike call option. This options current premium is $18.80. The option seller would receive $1,880, excluding trading commissions.

There are two expiration dates in the strategy, making it quite difficult to give an exact formula for a break-even point. Different brokers might offer profit-and-loss calculators” for such a trade setup.

The maximum potential is realized if the stock price is equal to the strike price of the short call on its expiration date. So, the trader wants the LMT stock price to remain as close to the strike price of the short option (i.e., $450) as possible at expiration (on June 17), without going above it.

Here, the maximum return, in theory, would be about $1,730 at a price of $450 at expiry, excluding trading commissions and costs.

However, in practice, it might be more or less than this value. There is, for example, the element of time decay that would decrease the price of the long option. Meanwhile, changes in volatility could increase or decrease the option price as well.

Here, by not investing $44,920 initially in 100 shares of Lockheed Martin, the traders potential return is leveraged.

Ideally, the trader hopes the short LMT call will expire out of the money, or worthless. Then, the trader can sell one call after the other, until the long LMT LEAPS call expires in January 2024.

Lockheed Martin: 3 Trades To Leverage Growth In Aerospace And Defense Market
 

Related Articles

Lockheed Martin: 3 Trades To Leverage Growth In Aerospace And Defense Market

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Mohd Izhar Muslim
Mohd Izhar Muslim Apr 28, 2022 1:55PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thank you for sharing the article 👍
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email