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Top Trades for Mon, 10 Jun 2019 15:41 – LMT

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Top Trades for Mon, 10 Jun 2019 15:41 – LMT
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Very nice for LMT over 3 years as their current sales are only $54Bn so + 20% in sales AND of course, they still have to maintain and repair the fleet and that's going to be no less than 10% of the $34Bn a year, probably more like 20%…

  • The U.S. Department of Defense says it has a "handshake" agreement with Lockheed Martin (LMT -0.7%) for the first multi-year purchase of F-35A fighter jets that would cut the price by 8.8% and bring the price of each aircraft below $80M/year earlier than expected.
  • The agreement is preliminary and a final deal is expected to be sealed in August for the 12th batch of jets worth $34B, Reuters reports.
  • The first-ever multiyear agreement for the jets represents a shift in sales practices from annual purchases to more economic multi-year deals that lower the cost of each jet to $81.35M from $89.2M.

Also, their R&D expenses for the F35 will be dropping too.  Unfortunately, LMT is high in the channel but I do like them long-term as a fusion play as well.  

Year End 31st Dec 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
Revenue $m 45,358 39,946 40,536 47,290 49,960 53,762 56,463 57,983 61,043 +3.5%
Operating Profit $m 4,505 5,012 4,712 5,888 6,744 7,334 7,892     +10.2%
Net Profit $m 2,981 3,614 3,605 5,173 1,963 5,046 5,593 5,799 6,873 +11.1%
EPS Reported $ 9.04 10.1 9.93 12.1 13.0 17.4 19.4     +14.1%
EPS Normalised $ 9.90 10.1 10.1 12.3 13.0 17.7 19.5 20.5 24.7 +12.4%
EPS Growth % +17.0 +2.0 +0.3 +21.3 +5.8 +36.5 +36.0 +15.7 +20.3  
PE Ratio x           20.0 18.2 17.3 14.4  
PEG x           1.27 1.16 0.85 1.38
Profitability

$350 is only $100Bn in market cap for them so dropping $5Bn to the bottom line is still OK but I think this news makes these earnings estimates too conservative.  I guess we can work off the premise that we'd certainly like to get into LMT for $300 so let's do this in the LTP:

  • Sell 5 LMT 2021 $300 puts for $18 ($9,000)
  • Buy 5 LMT 2021 $330 calls at $50 ($25,000) 
  • Sell 5 LMT 2021 $365 calls for $30 ($15,000) 
  • Sell 2 LMT Sept $360 calls for $11.20 ($2,240) 

So we're in the $17,500 spread for a net $1,240 credit and we have 5 more cycles to sell so possibly $11,000ish in credits plus the spread could be $28,000 if LMT goes up $13 (3%) in 18 months – I like those odds!  Worst case is we own 500 shares for less than $300 ($150,000) but we'd certainly roll down before doing anything drastic (the June $370 puts are $18 so figure we can roll down $60 every 18 months – that's pretty comfortable).

This was our old LTP trade that we already cashed in:

LMT with really good earnings, on track to make $17+.  P/E around 20 at $324 but they still look like the top contender to commercialize fusion first – which is a Trillion-Dollar opportunity, long-term.

I like them because they are one of the last remaining companies with a real R&D budget.  I think at $250 I'd be really excited to own them so no reason not to sell 5 LMT 2021 $280 puts for $21 ($10,500) in the LTP, to remind us to keep an eye on them (and to drop $10,500 into our pockets).