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2021.01.10 Penn Wealth Report Vol 9 Issue 01

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16 penn wealth Report volume 9 issue 01 10 Jan 2021 Penn Wealth Report Copyright 2021. All Rights Reserved. investment intelligence Lockheed Martin Corp Aerospace & Defense e content of this report reflects the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guaran- tees can be made and the firm is not liable for any losses incurred by subscribers. is is not a solicitation to buy. Always consult your investment professional before investing any money. There are five reasons we particularly like aerospace giant Lockheed Martin LMT $340 right now: we are overweighting Industrials in 2021, the private space business is in its nascent stages but about to mushroom, Boeing BA $206 is not currently an attrac- tive investment, management is taking aggressive steps to retain the company's industry leadership, and the shares are sim- ply undervalued. Taking our investment theses in reverse order, Lockheed's 14.5 P/E ratio is histor- ically low (it carried a 50 P/E three years ago), and well below the current multi- ples for both the S&P 500 (40) and the Aerospace & Defense industry (20). It remains ignored and unloved by tech-hun- gry investors who are too focused on shiny baubles to see diamonds in the rough like a cutting-edge aerospace firm. Undeterred by its low share price, the company is forging ahead with the moves necessary to retain its pole position in the industry. Most recently, it bought Penn New Frontier Fund member Aerojet Rocketdyne AJRD for $4.4 billion, acquiring its key supplier of rocket engines and pro- pulsion systems. About one third of Aerojet's $2 bil- lion in annual sales comes from Lockheed, with another one third being generated by the US government (typically for sales to NASA) and Raytheon Technologies RTX —a fellow Penn Global Leaders Club mem- ber. ere is a fierce fight going on right now between the private space companies (SpaceX, United Launch Alliance, Virgin Gallactic, Blue Origin) vying for both pri- vate aerospace travel and deep space NASA missions, and this intense competition por- tends a bright future for Aerojet and its new parent company. And the firm's propulsion systems aren't limited to earthly launch plat- forms. e company's NEXT-C ion engine will power the next-generation of vehicles set to explore our solar system. We mentioned Boeing's woes as a reason to invest in Lockheed Martin. Boeing, espe- cially after its acquisition of McDonnell Douglas, used to be the go-to defense con- tractor in the United States. ere was a point at which we couldn't imagine not own- ing shares of BA in our Global Leaders Club. To say Boeing passed the baton is not fair; they took the baton and heaved it out into a grassy field off the tarmac for anyone to claim. While Lockheed and Boeing are joint members of the United Launch Alliance (ULA), that organization's recent failures sit at the doorstep of the latter. Lockheed Martin is now, in our opinion, the dominant leader in aerospace and defense. Just like McDonnell Douglas once held a cash cow in the form of the F-15 Eagle, the leading superiority fighter in the world for decades, Lockheed Martin is the prime contractor for and developer of the F-35 Lightning II, the largest weapons program in history. is system will create a healthy rev- enue stream for the company over the span of the next several decades. Furthermore, Lockheed is the prime contractor for the National Defense Strategy, the DoD's cap- stone strategic guidance. is Strategy emphasizes missile development and defense, one of Lockheed's core competencies. If Lockheed had one missing piece to the puzzle with respect to the military and com- mercial exploitation of space, they found that piece with the Aerojet Rocketdyne acquisition. e company will remain a critical partner for virtually every player in the field. We project industrials to be one of the leading sectors in the year ahead, with the Aerospace & Defense industry leading the pack. While we own several players in the industry, Lockheed Martin is our favor- ite undervalued play right now. Our most recent acquisition of LMT shares took place last May around $340 per share, with a 12-month target price of $450 per share. Lockheed's acquisition of Aerojet Rocketdyne made it an even more compelling story. ...Boeing did not pass the baton, they took the baton and heaved it out into a grassy field off the tarmac for any- one to claim. LMT @ $340

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