Shares of Lockheed Martin (NYSE: LMT) have managed to hold on to a big rally this year through the recent round of extreme market volatility. The stock is up about 21% in 2024, sitting near an all-time high, even as the S&P 500 has pulled back by more than 7% from its peak in recent weeks.
That dynamic is great news for investors, suggesting the stock remains well supported by strong fundamentals and a positive outlook. In this case, the defense sector juggernaut is capturing a demand boom from ongoing geopolitical conflicts as an earnings tailwind.
Could Lockheed Martin make a good addition to your portfolio? Here's what you need to know.
A digital transformation driving growth
A major theme for Lockheed Martin has been its ongoing "21st Century Security" initiative to accelerate the integration of more advanced technologies across its product portfolio.
The move is important as military programs typically face a complex approval process for design updates and new software solutions. The effort includes investments in artificial intelligence while strengthening cybersecurity capabilities representing key growth drivers. The goal is to deliver more diversified growth with increased profitability.
The strategy appears to be paying off. Lockheed last reported second-quarter results (for the period ended June 30) with earnings per share (EPS) of $6.85, up from $6.63 in the prior-year quarter. Revenue of $18.1 billion climbed 9% year over year and nearly $1 billion above the average Wall Street estimate. The move in free cash flow is even more impressive, reaching $1.5 billion, nearly double the $777 million in Q2 2023.
Management cites momentum from the rotary and mission systems segment, where Q2 sales climbed 17% from last year. This group includes over 1,000 programs across helicopters, radar, and intelligence controls, proving critical in active theaters across Eastern Europe and the Middle East. The missiles and fire control business has also been strong with 13% sales growth this quarter.
Maybe the biggest development for Lockheed Martin this year is the restart of F-35 jet deliveries for the U.S. Department of Defense that had been stalled for the past year pending necessary hardware and software updates. The expectation is that a ramp-up in production within the company's digital transformation strategy drives an improved growth outlook for the core Aeronautics segment.
In terms of guidance, the trends have been good enough for the company to hike full-year estimates. Lockheed Martin now expects 2024 EPS between $26.10 and $26.60, up from the prior $26 midpoint estimate on sales between $70.5 billion and $71.5 billion, up around 6% from 2023.
Image source: Getty Images.
A defense sector leader at an attractive valuation
The attraction of Lockheed Martin as an investment opportunity starts with its sector leadership, in an area of the market that gained importance in recent years, going back to the start of the Russia-Ukraine conflict in 2022 and including the more recent situation in the Red Sea.
We can all hope for a quick and peaceful resolution, but the reality is that national security is big business. Lockheed Martin is well positioned to capture increasing defense budgets from allied forces worldwide.
I believe the stock trading at 21 times its 2024 EPS estimate still offers good value next to peers like RTX, Northrop Grumman, and General Dynamics, which are priced at a similar average earnings premium.
The key here is that Lockheed Martin's positioning in high-profile programs like the F-35 fighter or Sikorsky UH-60 Black Hawk helicopter could justify an even higher premium. Ultimately, the company's ability to lift margins as it becomes more high-tech should allow the stock to trade at a valuation spread above its peer group over time.
LMT PE Ratio (Forward) data by YCharts
Deciding on Lockheed Martin Stock
There's a lot to like about Lockheed Martin with a long history of generating positive shareholder returns. The combination of a steady growth outlook with overall solid fundamentals warrants a buy rating for the stock in my opinion.
Investors interested in the stock could consider adding a position to a diversified portfolio. I like the dollar-cost averaging strategy, purchasing shares over time to help mitigate near-term volatility.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
