Defense stock looks to regain altitude
07/24/18

A somewhat forgotten stock story from several months ago is the defense and aerospace industry, which was tagged as a potential outperformer amid the Trump administration’s pledge to increase defense spending.

After a great 2017, defense and aerospace shares have done fairly well this year, up around 7% and one of the bright spots in an industrial sector that’s still in the red for 2018. But many of these stocks, including big names like Raytheon (RTN), Northrop Grumman (NOC), and Lockheed Martin (LMT), have been struggling a bit to get their afterburners going, despite staying relatively close to their highs.

Lockheed Martin (LMT), 12/31/12 – 7/23/18. Lockheed Martin (LMT) weekly price chart. Into the stratosphere

Source: OptionsHouse


But the weekly chart above shows LMT shares haven’t needed newly increased defense spending to spur their long-term growth: Lockheed has been a trend machine for the past five-plus years, having more than tripled from its early 2013 lows; the stock’s current downturn has been its most significant during this period.

The daily chart below shows that after hitting a new high in January, the stock began correcting with the rest of the market, but bounced back almost immediately amid the White House’s 2019 defense budget announcement on February 12; at the time, LMT was cited as one of two stocks (along with Boeing) best positioned to benefit from increased defense allocations.1 After pulling back, the stock very nearly matched its previous high again on April 24, when it sold off sharply after releasing positive earnings but seemingly disappointing the market with its level of free cash flow, which some analysts had expected to be higher given the current (and expected future) level of military spending.2

Lockheed Martin (LMT), 12/27/17 – 7/23/18. Lockheed Martin (LMT) daily price chart. Poised for earnings.

Source: OptionsHouse


At the same time, Lockheed was getting some pretty good news on the product front, most significantly the increased sales of its F-35 fighter jet3 and the successful introduction of a new missile system.4 And after making a new swing low in late June, LMT rallied back into the zone of its May-June trading range—erasing its June sell-off—before consolidating over the past several days with the approach of today’s earnings.

What will today’s report tell us? Well, Lockheed has a history of producing good numbers, that’s for sure. Over the past 31 quarters, LMT has beaten earnings 84% of the time and topped revenue estimates 77% of the time.5 The stock’s average performance immediately after earnings is a different story, though. It’s not that it’s bad, it’s just that sometimes the stock goes up and sometimes it goes down, with the average result being sort of…average.

If there’s a minor bias, it’s a tendency for the stock to perform a little worse in the first few days after earnings than in the days prior to the release. Since October 2010, LMT has gained ground only 14 times in the four days after the announcement (which includes earnings day itself, since LMT traditionally releases its numbers before the open).

Individual cases are a different story, as LMT’s two most recent earnings releases vividly illustrate. The stock dropped more than 6% on April 24 but rallied nearly 2% on January 29—and both times the company beat its headline numbers and issued steady forward guidance.

Bulls will be eyeing at least a move to the resistance around the prior trading range’s high (around $330), with a couple of closes above that level seen as evidence the stock has the possibility of reigniting its long-term trend. And while an initial down move is certainly possible (remember that tendency for post-earnings weakness), savvy bulls won’t want to see the stock spend more than a day or two below the lower boundary of the range.

Either way, the stock is locked and loaded.

 

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1 CNBC.com. Boeing, Lockheed Martin are the ‘early winners’ under Trump’s budget proposal: JP Morgan. 2/13/18.

2 TheStreet.com. Lockheed Martin Falls on Disappointing Cash Flow Outlook. 4/24/18.

3 Forbes. Lockheed And Boeing Soar Sky High Upon Increase To Defense Spending. 4/18/18.

4 Seeking Alpha. Lockheed Martin Bombs On Good News. 5/9/18.

5 StreetInsider.com. Lockheed Martin (LMT) Earnings. 7/23/18.