April 25, 2016

Traditional Valuations Of Lockheed Martin’s Equity Are Inaccurate


  • Using Adjusted Earnings and Assets, LMT’s Adjusted Return on Assets was 16% in 2015 – twice the traditional 8% ROA most financial databases report.
  • This difference is primarily caused by LMT’s $13.6bn goodwill, which significantly distorts the firm’s economic reality.
  • Also of note is the difference between LMT’s Adjusted Forward Value to Earnings ratio of 23.6x versus the firm’s traditional forward P/E of only 16.6x.

LMT - 2016 04 19

Performance and Valuation Prime™ Chart

Under GAAP, the as-reported financial statements and financial ratios of LMT do not reflect economic reality. The traditional ROA computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics of LMT are primarily driven by the inclusion of the firm’s goodwill ($13.6bn), which inflates the firm’s asset base, and by incorrectly expensing R&D ($839mn) and operating leases ($256mn) rather than treating them as part of the company’s investments.

After adjusting for similar issues and a host of other GAAP-based miscategorizations, Valens calculates LMT’s Adjusted Return on Assets as 16% in 2015. In contrast, most financial databases show a traditional ROA of only 8%. Additionally, our analysis shows that LMT has an Adjusted Forward P/E of 23.6x, compared to the firm’s traditional forward P/E at 16.6x. The profitability of LMT’s operations and their equity’s true value are therefore not what traditional metrics originally indicate.

Click here to read the article in its entirety at Seeking Alpha.