Lockheed Martin (LMT): Defensive Value

"Lockheed is the chief contractor on the new F-35, the fifth-generation, radar-evading fighter jet that will be adopted by the U.S. and its NATO allies, as well as the defense forces of other friendly nations.

"While the U.S. Defense Depart-ment has deferred acquisition of some jets beyond 2015, other nations are eager to add them to their arsenals.

"Israel, for instance, just inked a $2.75 billion contract deal to purchase 20 jets. The F-35 is expected to comprise a quarter of Lockheed's revenue in the years ahead.

"Lockheed also is likely to pick up other new business in the coming years, such as the Littoral Combat Ship, a new generation high-speed vessel designed to operate in shallow coastal waters and defend against asymmetrical warfare.

"Ultimately, these ships could comprise 15% of the U.S. Navy's fleet.

"Lockheed's stock is trading at just 8 times cash flow, vs. an historical multiple of 11 times. It's also cheap on an earnings basis, with a low price/earnings multiple of 10. Thanks to the latest dividend hike, it yields a robust 4.3% too.

"Management has ample room to hike that payout in the future (as it has every year since 2003). And part of the excess cash is going to stock buybacks, which boost the per-share results.

"A return to historic valuations would lead to a 35% to 40% jump in the share price. It won't happen overnight, but a low valuation now provides good upside potential.

"Lockheed has outperformed its peers, but it has dropped 20% from its April highs. Use current defense-sector weakness to pick up Lockheed Martin."

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