Is Lockheed Martin Corporation (LMT) a Cash King?

Cost-cutting at the Pentagon, along with other buyers, has caused all of these businesses to suffer from declines in their sales—and threats of further defense spending cuts have shareholders spooked. However, investors should keep in mind that, in defense, “spending cuts” is usually code for slowing growth in spending rather than lowering existing spending. However, these conditions still have Lockheed Martin Corporation (NYSE:LMT) scrambling to minimize costs to avoid significant reductions in its profit margins. Also, if the cuts do happen, heavy exposure to capital-intensive products, including tanks and warships, could put General Dynamics in a tough spot. Raytheon, on the other hand, has managed to maintain some of the highest profit margins in the industry, and has analysts predicting an annual growth rate of approximately 6% per year. Northrop Grumman is expected to see reductions in its sales volume over the next few years, too.

The cash king margin can help you find highly profitable businesses, but it should only be the start of your search. The ratio does have its limits, especially for fast-growing small businesses. Many such companies reinvest all of their cash flow into growing the business, leaving them little or no free cash, but that doesn’t necessarily make them poor investments. Conversely, the formula works better for slower-growing blue chips. You’ll need to look closer to determine exactly how a company is using its cash.

Still, if you can cut through the earnings headlines to follow the cash instead, you might be on the path toward seriously great investments.

The article Is Lockheed Martin a Cash King? originally appeared on Fool.com.

Jim Royal has no position in any stocks mentioned. The Motley Fool recommends McDonald’s. It owns shares of General Dynamics, Lockheed Martin, McDonald’s, Northrop Grumman, and Raytheon.

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