Lockheed Martin Corp.’s LMT shares surged an impressive 23.6% in the year-to-date period, outperforming the Zacks Aerospace-Defense industry, the broader Zacks Aerospace sector and the S&P 500. As the largest defense contractor in the United States, Lockheed rides on its solid presence in both domestic and international defense space, innovative products in the pipeline as well as a solid financial position.
A similar stellar performance has been offered by other defense players, such as RTX Corp. RTX, Leidos Holdings LDOS and Embraer S.A. ERJ, whose shares have witnessed a surge of 40.7%, 36.7% and 76.9%, respectively, year to date.
Lockheed YTD Performance
Image Source: Zacks Investment Research
With Lockheed riding high, individuals may rush to add it to their portfolio. However, before making any hasty decision, it would be prudent to take a look at the reasons behind the surge, the stock’s growth prospects as well as risks (if any) to investing in the same. The idea is to help investors make a more insightful decision.
What Led to Lockheed’s Surge?
As a prominent defense contractor in the global military space, Lockheed enjoys a continuous flow of orders for its varied defense products, which range from stealth fighter aircraft and combat ships to military radars and lethal missiles. With the United States being the largest weapons exporter worldwide, Lockheed benefits immensely from its predominance in this nation’s defense market.
On Apr 20, 2024, the U.S. House of Representatives passed three bills, providing a total of $95 billion in additional supplemental funding for Ukraine, Israel and Taiwan, funding for the restocking of the U.S. munitions capacity. With LMT’s defense products constituting a major portion of U.S. munitions supplied to these nations in the form of military aid, such bills should boost the company’s future revenues.
Apart from its well-established position in the U.S. defense market, Lockheed witnesses a strong forte for its products in the international market. Evidently, in July 2024, the Netherlands government signed a formal agreement to purchase LMT’s Joint Air-to-Surface Standoff Missile Extended Range (JASSM-ER), thereby becoming the fifth international customer for JASSM-ER. In July, the Greek government signed a Letter of Offer and Acceptance (“LOA”) to procure 20 F-35 aircraft, with the LOA including the option to procure another 20 such jets.
To further enhance its market presence, the company is innovating multiple programs that are entering growth stages, including the F-35 sustainment activity, increased Patriot Advanced Capability-3 (PAC-3) production rate, the modernization and enhancements to the Trident II D5 Fleet Ballistic Missile, and development of multiple hypersonic programs.
A solid financial position enables LMT to smoothly invest in such innovations and also reward its shareholders with notable dividend payments. As of Jun 30, 2024, Lockheed paid out dividends worth $1.53 billion to its shareholders.
Is LMT’s Growth Sustainable?
Looking ahead, growth prospects for the global defense industry remain bright, backed by emerging geopolitical tensions that have led to a massive spike in weapons stock depletion and increased defense spending from both developed and developing nations across the world. Hence, the stage is set for a stable growth trajectory for S&P 500 defense stocks like Lockheed.
The consensus estimate for LMT’s earnings is pegged at a solid 4.7%.
A quick sneak peek at its near-term earnings and sales estimates mirrors a similar picture.
Upbeat Estimates
The Zacks Consensus Estimate for LMT’s 2024 and 2025 sales reflects an improvement of 5% and 4.3%, respectively, year over year.
The Zacks Consensus Estimate for 2024 and 2025 earnings per share has moved north 0.8% and 1.7%, respectively, over the past 60 days. The upward revision in earnings estimates indicates analysts’ increasing confidence in the stock.
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
Risks to Take Note of
Despite the aforementioned growth opportunities, there are certain challenges in the industry that one should consider before investing in any defense stock. One notable headwind plaguing the industry is the shortage of skilled labor, which has been exacerbated by an aging workforce.
Per a study by the Aerospace Industries Association (AIA), industry retirements are estimated to create a gap of 3.5 million workers by 2026. This poses a great risk for manufacturing companies like Lockheed, as such labor shortages can cause it to fail its due product delivery time.
Moreover, the company has been experiencing performance issues for some of its programs, which, in turn, has been causing it to incur losses. Evidently, its CH-148 aircraft experienced performance issues, including delays in the final aircraft deliveries from the original contract requirement to the Royal Canadian Air Force. As of Jun 30, 2024, the company’s cumulative losses in relation to this program totaled approximately $100 million. Further delays and similar program issues may increase LMT’s losses, thereby adversely impacting its operating results.
Trading at a Premium
In terms of valuation, LMT’s forward 12-month price-to-earnings (P/E) is 20.08X, a premium to its peer group’s average of 18.83X. This suggests that investors will be paying a higher price than the company's expected earnings growth compared to that of its peers.
Image Source: Zacks Investment Research
What Should an Investor Do?
To conclude, investors interested in Lockheed should wait for a better entry point, considering its premium valuation. LMT currently has a VGM Score of C, which is not a very favorable indicator of strong performance.
However, those who already own this Zacks Rank #3 (Hold) stock may stay invested as the company's financial stability, upbeat estimates and solid presence in the global defense industry offer solid future prospects.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Free: See Our Top Stock And 4 Runners UpLockheed Martin Corporation (LMT) : Free Stock Analysis Report
Embraer-Empresa Brasileira de Aeronautica (ERJ) : Free Stock Analysis Report
Leidos Holdings, Inc. (LDOS) : Free Stock Analysis Report
RTX Corporation (RTX) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
