Lockheed Martin Now A Buy Thanks To Trump

Stifel has upgraded Lockheed Martin Corporation (NYSE: LMT) to Buy from Hold, as it predicts a Trump victory could lead to more defense spending dollars to the company’s F-35 fighter plane.

The brokerage expects by 2018, the F-35 should benefit from a mix of initial fixed-price incentive aircraft revenue. The comments should soothe investor concerns after the company expressing displeasure with the terms of the LRIP 9 contract for the F-35.

Also, Stifel noted that higher volumes of F-35 should offset any potential modest margin pressure in 2018, while expressing being encouraged by the company’s commentary on 2018 free cash flow.

Political Influences

“Given Mr. Trump's focus on the rebuilding the Army, incremental funding could be directed at recapitalizing the Army's aging helicopter fleet, which could pull forward slightly the expected rebound in Sikorsky revenue; however, we see the Navy and Air Force as bigger priorities,” analyst Joseph DeNardi wrote in a note.

DeNardi also pointed the company is well positioned to benefit from continued strong demand from missile defense.

Analyst Expectations

Meanwhile, the analyst estimates Lockheed’s free cash flow to average roughly $15.50 per share from 2016–2018.

DeNardi believes higher CAS recoveries and increased cash from F-35 should offset headwinds from higher pension costs in 2018 and allow the company to reach its cumulative cash flow generation of $15 billion between 2017–2019.

“In our view, this level of cash flow is adequate to continue to support >$2 billion in annual buybacks and >10 percent annual dividend increases,” DeNardi highlighted.

As such, DeNardi raised his price target by $30 to $290.

At the time of writing, shares of Lockheed Martin rose 3.12 percent to $267.25.