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How far off is Lockheed Martin Corporation (NYSE:LMT) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in April 2018 so be sure check the latest calculation for Lockheed Martin here.
Crunching the numbers
We are going to use a two-stage DCF model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To begin, I took the analyst consensus forecast of LMT’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 9%. This resulted in a present value of 5-year cash flow of US$20.25B. Keen to know how I arrived at this number? Read our detailed analysis here.
The graph above shows how LMT’s earnings are expected to move going forward, which should give you an idea of LMT’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes US$64.38B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$84.63B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $296.10, which, compared to the current share price of $351.99, we see that Lockheed Martin is fair value, maybe slightly overvalued at the time of writing.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For LMT, I’ve compiled three important aspects you should further examine:
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Financial Health: Does LMT have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
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Future Earnings: How does LMT’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
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Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of LMT? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!