Despite Lockheed's Decade-High Valuation, RBC Downgrades On Expected Slowdown

RBC Capital Markets' Robert Stallard downgraded Lockheed Martin Corporation (NYSE: LMT) from Outperform to Sector Perform with an unchanged price target of $244.

However, Stallard changed the valuation due to the strong performance of the stock. Lockheed is at its "highest valuation that we have seen in 10 years — and the only time that the valuation was higher was when the DoD budget was growing at a double digit rate in 2002–03 and the US military was heavily engaged in Afghanistan," Stallard noted.

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The elevated valuation can be attributed to the F-35 finally reflecting an improved outlook as there is a "material pick up in deliveries," the analyst said. The program is expanding from 20 percent to 30 percent of Lockheed's sales by 2018.

The downgrade comes as freedom on cash deployment decreases. Cash contribution to the pension of $1.5 billion is due in 2018 and "60 percent of its 2016E EPS" is represented by its dividend, Stallard reported. Lockheed also has "less headroom growing the DPS" with a plan to aggressively buy back stock, the analyst stated.