Lockheed Martin Still Strong

Lockheed Martin Corporation (LMT) appears well positioned to continue to benefit from strong defense outlays through 2008-09, debt repayment, and an ongoing share repurchase program since October 2002. Solid operating results via existing and new contracts -- both domestic and international -- coupled with the success of its C-130J and F-35 aircraft continue to deliver strong earnings and cash flow growth.

Management increased its 2008 earnings guidance, which supports the bullish outlook. Additionally, the company's dividend was recently increased by 20%. LMT remains a key player within the military space and the company continues to benefit from strong defense spending. In addition, management intends to explore the strong business opportunities outside of the traditional defense market, specifically in the areas of civil, government and the commercial space businesses.

Going forward, we believe LMT has significant upside potential based upon additional earnings accretive acquisitions, above-industry average return-on-invested-capital, expanding product lines, and continued strong earnings and cash flow growth. As of this report, LMT stock is trading at only 13.5x our 2008 earnings per share estimate and 12.3x our 2009 EPS estimate. Likewise, on the basis of relative multiples of sales, LMT also trades at the median of its peers.

Accordingly, we maintain our BUY recommendation on LMT with a six-month target price of $107.50, or 14.6x our 2008 EPS estimate and 13.3x our 2009 EPS estimate. Price appreciation to our near-term valuation target, coupled with the recently increased $0.42 per share quarterly dividend which appears very sustainable and secure based upon sub-25% projected earnings payouts through 2009 represents annualized total return potential of 19.7%.

Hold Consolidated Graphics

Consolidated Graphics, Inc. (CGX) reported third quarter EPS of $1.58, above our expectations of $1.27 and up 35% year-over-year, primarily due to a lower effective income tax rate (19% versus 36%) as well as from acquisitions, cost-reduction efforts, and the impact of share repurchases. The company's strategic sales initiatives (national account customers and CGX Solutions) continue to grow. However, we expect decelerating sales and EPS growth in FY08 on weaker organic growth sales expectations.

With a total return potential of less than 10% from the current price, we maintain our Hold recommendation on shares of CGX. We have valued Consolidated Graphics using P/E valuation metrics. At the current price, CGX shares are trading at 11.6x our FY08 EPS estimate of $4.70, which is almost in-line with the industry median multiple but at a premium to its peer R.R. Donnelley & Sons Company (RRD). Historically, CGX has traded at a premium to its larger peer, R.R. Donnelley & Sons Company on account of its higher growth rate.

In a slowing domestic economy, though, we believe investors will reward large-cap names with a higher multiple over small peers. To reflect our concerns about the economic slowdown and risks to margin expansion, we are forecasting decelerating sales and EPS growth in FY08. Consequently, we do not expect significant P/E multiple expansion. Our target price of $56.50 per share is based on around 12x our FY08 EPS estimate of $4.70. This represents a total return potential of less than 10% approximately 4%. As a result, we reiterate our Hold recommendation on shares of CGX.

Analog Devices Fairly Traded

Analog Devices, Inc. (ADI) is a leading supplier of analog and DSP integrated circuits. January quarter results were generally in-line with consensus expectations. The triple-digit growth in communications offset the decline in the other served end markets. The backlog increased slightly.

Forward revenue guidance is for a 0-4% increase in Q2. The shares have good long-term potential, but given the uncertain macro economic situation, the valuation seems fair. The company has generated very stable margins so far. However, the increasing percentage of consumer products in the mix could be a headwind in ensuing quarters.

We are initiating coverage with a Hold rating on ADI shares.