Seven new stocks make February’s Exec Comp Aligned with ROIC Model Portfolio, available to members as of February 12, 2021.
Recap from January’s Picks
My Exec Comp Aligned with ROIC Model Portfolio (+2.9%) underperformed the S&P 500 (+3.1%) from January 14, 2021 through February 10, 2021. The best performing stock in the portfolio was up 18%. Overall, six out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P from January 14, 2021 through February 10, 2021.
More reliable & proprietary fundamental data, proven in The Journal of Financial Economics, drives my firm’s research. My firm’s proprietary Robo-Analyst technology scales forensic accounting expertise (featured in Barron’s) across thousands of stocks to produce an unrivaled database of fundamental data.
This Model Portfolio only includes stocks that earn an attractive or very attractive rating and align executive compensation with improving ROIC. I think this combination provides a uniquely well-screened list of long ideas because return on invested capital (ROIC) is the primary driver of shareholder value creation.
New Stock Feature for February: Lockheed Martin LMT
MORE FOR YOU
Lockheed Martin (LMT) is the featured stock in February’s Exec Comp Aligned with ROIC Model Portfolio.
Lockheed Martin has grown revenue by 7% compounded annually since 2015 and net operating profit after tax (NOPAT) by 12% compounded annually over the same time, per Figure 1. NOPAT margin increased from 9% in 2015 to 11% in 2020.
Figure 1: Consistent NOPAT Growth
Performance-Based Pay Properly Incentivizes Executives
Lockheed Martin’s executive compensation plan aligns executives’ interests with shareholder’s interests by tying compensation to return on invested capital (ROIC). Apart from base salaries and short-term incentives, Lockheed Martin’s executives receive long-term compensation in the form of performance stock units (PSUs) and cash bonuses that are tied to an ROIC performance goal.
Lockheed Martin’s inclusion of ROIC as an executive compensation metric has helped drive shareholder value creation and economic earnings, per Figure 2. Lockheed Martin’s ROIC has improved from 10% in 2015 to 14% in 2020 while its economic earnings more than doubled from $2.2 billion to $5 billion over the same time.
Figure 2: Lockheed Martin’s Economic Earnings: 2016 to 2020
LMT Is Undervalued
At its current price of $337/share, LMT has a price-to-economic book value (PEBV) ratio of 0.6. This ratio means that the market expects Lockheed Martin’s NOPAT to permanently decline by 40%. This expectation seems overly pessimistic for a firm that has grown NOPAT by 14% compounded annually over the past two decades.
Even if Lockheed Martin’s NOPAT margin falls to 9.6% (10-year average, compared to 11.3% in 2020) and the firm grows revenue by 4% (equal to compound annual estimate from 2021 to 2025) compounded annually over the next 10 years, the stock is worth $627/share today – an 86% upside. See the math behind this reverse DCF scenario. In this scenario, Lockheed Martin’s NOPAT actually falls 1% compounded annually over the next decade.
Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology
Fact: I provide more reliable fundamental data and earnings models – unrivaled in the world.
Proof: Core Earnings: New Data & Evidence, forthcoming in The Journal of Financial Economics.
Below are specifics on the adjustments I make based on Robo-Analyst findings in Lockheed Martin’s 10-K:
Income Statement: I made $1.5 billion of adjustments, with a net effect of removing $537 million in non-operating expenses (<1% of revenue). You can see all the adjustments made to Lockheed Martin’s income statement here.
Balance Sheet: I made $31 billion of adjustments to calculate invested capital with a net increase of $17 billion. One of the largest adjustments was $16 billion in other comprehensive income. This adjustment represented 44% of reported net assets. You can see all the adjustments made to Lockheed Martin’s balance sheet here.
Valuation: I made $31 billion of adjustments with a net effect of decreasing shareholder value by $31 billion. There were no adjustments that increased shareholder value. Apart from total debt, one of the largest adjustments to shareholder value was $14 billion in underfunded pensions. This adjustment represents 15% of Lockheed Martin’s market cap. See all adjustments to Lockheed Martin’s valuation here. Despite these subtractions from shareholder value, LMT remains undervalued.
Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
 Harvard Business School features my firm’s research automation technology in the case Disrupting Fundamental Analysis with Robo-Analysts.
 See how my firm’s models overcome flaws in Bloomberg and Capital IQ’s (SPGI) analytics in the detailed appendix of this paper.