1. The defense industry
Before the company analysis, I will briefly explain the defense industry.
Contributing to the nature of defense expenses, the demand is always fixed as it is an essential cost for each country's security. In addition, the defense business requires high initial capital and technology, so entry barriers are high.
The trading entity is the Ministry of Defense of each country, and a company that has a high market share can solidify its position in the market because it is a long-term contract with one transaction.
Due to these characteristics, defense stocks generate stable cash flows. From an investor's point of view, it is easy to predict future cash flows, and dividend income increases as the business expands.
Defense expenditures move according to the financial situation of each government, but there is a downside rigidity in that it is an essential expense. There is no fear of drastically reducing demand.
2. Lockheed Martin
Lockheed Martin operates four businesses: aircraft, rotor craft-mission systems, missile-fire control, and space systems, and is the world's number one company in all businesses.
Products include F-35, F-16, C-130, and THADD, and in 2016, it acquired Sikorsky, a Black-hawk helicopter business, and diversified into various business fields, including operating military helicopter business.
As can be seen from the graph, of course, the US is dominant in the proportion of sales. The US defense budget expansion order backlog increased for eight consecutive quarters and reached a record high of $138 billion in the first half of last year.
In addition, it succeeded in reducing the unit cost of the next generation F-35 Lightening ll fighter, requested by the US Department of Defense, and signed a long-term contract.
Over the next five years, Lockheed Martin's market presence will remain solid.
You can check the company's financial soundness and profit growth over three years. Note that as net income increases, Cash Dividends Per Common Share has also steadily increased, and Total Debt, net (total debt) continues to decline. Although the ratio of debt to equity is high, financial stability is also excellent because sales are higher than total debt.
The ratio of return to capital is over 200%, and productivity is maintained very high. This is because the demand for fighter aircraft, which accounts for the largest portion of the defense industry, continues to increase, and the company's market share is dominant in that market.
Due to the nature of the defense manufacturing industry, tangible assets account for approximately 70% of assets, and intangible assets (patent and intellectual property value, brand value, goodwill and network value) are approximately 30%.
(Source: www.investing.com)
The long-term trend of the stock price is steadily upward, and there has been no loss of dividends since 1995 until now, and dividends have increased steadily every year.
To sum up, Lockheed Martin's business is backed by the essential demand for defense spending and maintains an overwhelming market share in all of its businesses.
In addition, it succeeded in diversifying our business through mergers and acquisitions, and by developing new products and reducing costs, it met the needs of the US Department of Defense.
It meets all of our investment principles: essential demand, high productivity versus capital, overwhelming market share, high barriers to entry, and realization of shareholder value.
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