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2022 07 28 - LMT MC ValuationReport - Draft03
2022 07 28 - LMT MC ValuationReport - Draft03
2022 07 28 - LMT MC ValuationReport - Draft03
RoE 348.24% 196.47% 113.17% 57.62% The Interval: Q3 2012 - Q2 2022. Lockheed Martin (Blue) has
RoA 11.24% 13.11% 13.47% 12.41% outpaced the S&P 500 (Pink) by 355% to 192%.
1
The analyst adjusted capitalization to account for Treasury Stock.
2
Yahoo! Finance Statistics at 2022-07-27.
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11,676.000 4.513%
Discussion With Tax Shield (20%) 3.669%
The analyst produced three distinct prospective models
of FCFE: 1) Static model varying WACC; 2) Static model Weighted Average Cost of Capital
varying Revenue Growth Rate; and 3) Dynamic multi-
𝐾𝐾 𝐵𝐵+𝐾𝐾 𝐸𝐸 [3.669%X0.38765]+[6.557%X0.61235]
iterative Monte Carlo model oscillating all variables 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊 = 𝐵𝐵
B+E
𝐸𝐸
= 1.000
within a tolerance of 10% coefficient of variability. [1.422%] + [4.015%]
=
These models suggest a range of Equity valuation for 1.000
= .05437144 = 5.437144%
Lockheed Martin. The results page discusses the
Market Capitalization Basis; B=Total Debt (adj. with carrying
outcomes of these Equity valuation simulations. costs); E=[Total Capitalization - (Preferred+Debt)] v
STATIC MODEL: PROSPECTIVE VIEW Results of the Variable WACC Growth Rate
Results of the Variable Revenue Growth Rate
Discussion
The analyst expects the firm would regress to its mean
revenue growth rate of 3.745% (mimicking the U.S. long-
term inflation rate plus a risk premium of approximately
100 to 150 basis points) with some upside potential as
the post-COVID international climate grows more
concerned of Russia’s and China’s intensifying influence
beyond their traditional range of geography. North
Korea’s ongoing bellicosity also concerns the U.S. and its
allies. The transition to a tri-polar world coupled with the
ongoing threat of rogue nation-states, international This chart (above) plots Lockheed Martin valuations at
terrorism, and piracy at sea is nudging many western different rates of capital costs. The expected value per share is
countries to significantly upgrade their military materiel. $473.83 at the calculated WACC: 5.437% (roughly 250 bp
above RF ). Higher WACC returns lower per share valuations.
This display reflects per share valuations from a 1.00%
annual growth rate of revenue ($354.06 per share) Discussion
through 6.00% annual revenue growth ($621.03 per
share). The Prospective free cash-flow to equity analysis The analyst expects LMT’s weighted average cost of capital to
be no less than 5.00%, but it may be higher. Thus, the Firm
returned an expected per share valuation of $473.836 at
would produce true value only through increased growth in
a 3.50% growth rate, with WACC of 5.437%. revenue (greater volumes of government contracts and
foreign sales). As most LMT contracts are cost-plus-profit, the
firm tends to keep its costs to minimum values within the
constraints of quality control and the demands of U.S.
government oversight.
Mean: 5.437%
Standard Deviation: 0.10874% (2.0% of the mean)
Hence, the Monte Carlo results would likely capture the range
of capital costs within its 1 Million iterations Normally
distributed.
Sensitivity Analysis
The Monte Carlo FCFE DISCOUNTED CASH FLOW PROJECTION is sensitive to particular conditions: 1) Because the
perpetuity
CashFlow dwarfs
estimated cash-flow
in any given annum,
the terminal year
COST OF GOODS SOLD
typically asserts
dominance over the
Firm and its
weighted Equity
valuation; 2) 2022
COGS; 3) 2023
COGS; 4) 2024
COGS; 5) 2025 COGS
and 6) 2026 COGS
The Tornado Chart sensitivity analysis of Lockheed Martin’s valuation with these instant variables imputes
a heavy weighting upon the perpetuity model – likely because the near-term growth rate of 3.50% per
annum is relatively low. This analyst believes that Lockheed Martin will actually earn some stability in 2022-
2023 Y-o-Y revenue as the Russia-Ukraine conflict has sparked the U.S. government to increase support its
new ally in eastern Europe.
1) Cost of Sales dominates ultimate production of Shareholder Value and Returns on Equity. Businesses
have recognized this truth since humanity’s early ancestors debated whether to hunt every day
(including unhealthy hot days), or to gather shellfish, nuts, and greens on some days and expense
hunting assets (experience, training, and energy) only within profitable conditions. But Lockheed
Martin is structured as a Cost + Profit government contractor, under very strict government controls
for both quality and cost. In this case, Lockheed Martin can cut no costs (or potentially only very little
costs). The only manner in which the firm could grow total profits is by earning greater volumes of
contracts.
2) The Tornado analysis did not identify Tax payments under its sensitivity to variables assessment. The
analyst does point out: Clearly the 2017 Tax Cuts and Jobs Act (TCJA) which low-balled corporate tax
from 35% to 21% has raised U.S. corporate Net Income performance across the board. This effective
raise of corporate income translated itself into a major boost to the major U.S. Equity indices.
a. The analyst notes that any increase in U.S. corporate taxes will have an immediate effect on
LMT valuation (and all other U.S. corporate entities).
FINANCIAL INDICES
FINANCIAL INDICES
FINANCIAL INDICES
FINANCIAL INDICES
FINANCIAL INDICES
FINANCIAL INDICES
i
Lockheed Martin: Innovation With A Purpose (2013) p. 70 (Lockheed Martin, 2022)
ii
"At December 31, 2021 and 2020, the aggregate amount of liabilities recorded relative to environmental matters was $742 million and $789 million, most of
which are recorded in other noncurrent liabilities on our consolidated balance sheets. We have recorded assets for the portion of environmental costs that are
probable of future recovery totaling $645 million and $685 million at December 31, 2021 and 2020, most of which are recorded in other noncurrent assets on
our consolidated balance sheets. See “Note 1 – Organization and Significant Accounting Policies” for more information." (Lockheed Martin Corporation, 2022) p.
103
iii
Lockheed Martin 2021-12-31 10-K, p. 26 (Lockheed Martin Corporation, 2022)
iv
United States of America v. Lockheed Corporation, et al.; Related FCPA Matter: Lockheed's 1988 Involvement in Egypt (https://fcpa.stanford.edu/enforcement-
action.html?id=24) (Stanford University, 2022)
v
See the WACC Worksheet for details of each component. The Monte Carlo Workbook algorithm is hard coded to calculate WACC using various methods: CAPM,
Gordon Dividend Growth Model, RoE model, or combinations. In this instant, the system derived the WACC using market capitalization with the then share price
of $396 and with weighted number of shares equivalent to the average of 273 Millions (Yahoo Finance value for shares outstanding) and 266 Millions (the 2021-
12-31 10-K value). The coded WACC calculation used the Book Value of all Debt (B) to calculate its percentage of total capitalization, which also provided the
arithmetic reciprocal for the Equity weighting. The cost of debt (B) was derived above. The cost of Equity emerged from the Gordon Dividend Growth Model
using the then share price of $396 .