Aerospace & Defense
This week Alan wants to know about Lockheed Martin (LMT). He says, “Jay, with our strong military, I’m a big fan of Lockheed Martin, how does this look financially and morally?”
As we consider these choices, doesn’t it make sense to consider the moral implications of where we spend and invest our money? If a company blatantly violates your values do you want to shop or invest in that company? For many investors the answer is a resounding no!
“Proud to Own” Investing
Relatively few companies violate our moral and ethical screening process. For example, there are approximately 10,000 publicly traded companies (including both U.S. and ADRs) which are deemed large enough for prudent investment selection. Out of that universe, only 6.5% violate our moral and ethical screens. That leaves over 93% of the securities’ universe from which investment managers and/or individual investors can choose.
As investors we use a “proud to own” process:
It must not violate your faith and values. Some of the types of companies we can avoid include those involved in the abortion industry, those producing explicit entertainment and pornography, those conducting embryonic stem cell and fetal tissue research, companies funding and lobbying for homosexuality, those involved in vices like alcohol, tobacco and gambling and companies that are abusing the environment.
It should be a company that complements your faith and values. This involves finding companies: Helping the poor and defenseless; Protecting the sanctity of human life; Producing morally sound entertainment; Finding cures for life threatening diseases; and Improving the society we live in…
It should be a company with strong profit potential. This involves finding companies in solid financial condition that have strong profit potential and/or provide strong cash flows via dividends. We use a five-point inspection to evaluate each investment we are considering. We analyze a company’s earnings potential, price momentum, risk, financial health, and its current valuation. Our goal is to find quality companies that stay true to your values AND are profitable! This is not an either /or scenario but rather a winning combination.
A Look at Lockheed Martin
Let’s first take a look at Lockheed Martin…
Lockheed Martin Corporation (LMT), a security and aerospace company, engages in the research, design, development, manufacture, integration, and sustainment of advanced technology systems and products in the areas of defense, space, intelligence, homeland security, information technology, and cyber security in the United States and internationally. It also provides management, engineering, technical, scientific, logistic, and information services. The company operates in four segments: Aeronautics, Electronic Systems, Information Systems & Global Solutions (IS&GS), and Space Systems.
Looking at Lockheed from a Financial Perspective
We use a five point financial inspection to evaluate a company.
Valuation – Lockheed Martin is a little expensive from a valuation standpoint. Its PE is 17, which isn’t too bad, but its PEG ratio is above 2 at 2.35.
Earnings momentum – It is ranked neutral, meaning it is neither positive nor negative.
Price momentum – The stock has been trending down on a short and up on a long-term basis. It is up about 16% over the past 12 months. Its relative strength rating is 73 so price momentum is neutral.
Risk – It has a beta of .59 so it is about half as risky as the overall market. So its risk profile is positive.
Financial health – the company is in solid financial condition with strong sales growth, abundant cash flow, low debt, and solid fundamentals.
Overall from a financial perspective Lockheed Martin stock is a buy…
Looking at Lockheed from a Moral Perspective
From a moral perspective Lockheed Martin fails one of our moral screens:
Homosexual activism – It is very active in promoting and supporting the homosexual community and organizations that lobby for homosexual rights. It has formed homosexual employee groups, promoted homosexuality in its marketing and advertising efforts, and sponsored homosexual organization events.
A better alternative to Lockheed Martin in my opinion is TransDigm Group (NYSE; TDG).
A Look at TransDigm Group
TransDigm Group Incorporated designs, produces, and supplies engineered aircraft components for use on commercial and military aircraft principally in the United States. The company’s products include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, pumps and valves, power conditioning devices, AC/DC electric motors and generators, NiCad batteries and chargers, engineered latching and locking devices, rods and locking devices, engineered connectors and elastomers, cockpit security components and systems, cockpit displays, aircraft audio systems, lavatory components, engineered interior surfaces, and lighting and control technology.
Looking at TransDigm from a Financial Perspective
On the financial side:
Valuation – TransDigm Group looks decent from a valuation standpoint. Its P/E is around 27, which is higher than Lockheed Martin. However, its PE/G ratio is under 2 at 1.96.
Earnings momentum – It is ranked positive, meaning it has a history of beating earnings expectations.
Price momentum – Transdigm’s stock has been trending up on both a short and long-term basis. It is up over 33% over the past 12 months (double the rate of Lockheed Martin). Its relative strength rating is 85 so the price momentum is positive and higher than Lockheed Martin.
Risk – It has a beta of .70 so it is 30% less risky than the overall market. It does have a slightly higher risk profile than Lockheed Martin.
Financial health – the company is in solid financial condition with strong sales growth, abundant cash flow, low debt, and solid fundamentals. This is a positive here.
Overall, TransDigm is also rated a “Buy” from a financial perspective and takes a slight edge over Lockheed Martin when we compare them financially.
Looking at TransDigm from a Moral Perspective
On the moral side, TransDigm also scores higher. It is focused on charitable donations and supporting many causes around the globe. It doesn’t fail any of our moral screens and is thus a “proud to own” company.
And the Winner is…
In the head to head battle, I declare TransDigm the clear winner when we look at both the moral and financial implications of investing…
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