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Lockheed Martin: Stock of the Week

The weapons and space business tempts with wide-moat benefits and government backing, but there are ESG risks.

Andrew Willis: With the war in Ukraine, tensions around the Taiwan Strait, and an appetite to return to the moon happening all at once, investors might be wondering about the stocks behind the related businesses of weapons and space.

The returns of the spaceship business are as complex as the underlying products, and are about as difficult to predict as the political process. But there are some advantages to investing in the defense industry. Take Lockheed Martin’s (LMT) deal with the U.S. government to maintain the F-35 fighter jet until 2070. Long-lasting revenue streams come with that political process, where trust between government and enterprises creates an insular environment and contributes to a wide moat.

Lockheed Martin Stock Has a Wide Moat

The Lockheed Martin stock moat also extends into space, where we see commercial investors like Amazon.com (AMZN) choose consortiums that include trusted defense "primes" like Lockheed. Plus, as of 2018, 60% of revenues in the space sector were still with the government.

Equity analyst Krzysztof Smalec favors companies that can generate a steady stream of contract wins with tangible growth profiles. That F-35 deal, for instance, already accounts for 30% of Lockheed’s revenue, and we shouldn’t discount ongoing maintenance deals.

Military Stocks and Budgets

Defense investors should also be looking for deterrence, or the act of governments increasing their military budgets. We expect the current environment to last at least several years, which could benefit businesses like Lockheed’s hypersonic and missile defense programs.

In weighing the opportunities for arms manufacturers ahead, it’s also worth considering related ESG risks, which are significant at Lockheed according to Morningstar Sustainalytics. Which leads to another thing for investors to watch for with companies that sell weapons: Who are the buyers?

For Morningstar, I’m Andrew Willis.

Check out Morningstar.ca to watch Nvidia: Stock of the Week