Where will Lockheed Martin stock be in 3 years?

Whether the company is a buy is an interesting question because it strikes at the heart of the bull-bear debate over Lockheed Martin (LMT 1.19%) stock. Here’s how long-term investors should think about investing in the defense contractor.

Buying Lockheed Martin stock

Investors often like to buy shares in defense contractors because of their end-customer guarantee in the market; after all, you can’t get a more reliable customer than the US government (typically responsible for about 70% of its total sales) and sovereign governments around the world. In addition, defense spending tends to be relatively stable and free of the cyclical peaks and troughs that plague most stocks.

These qualities make them solid candidates for a balanced portfolio. Throw in a medium-term boost to growth from the need to resupply equipment transferred to Ukraine, record US defense budgets and the concomitant rise in global defense spending (not least by existing and new NATO allies), and there’s a strong case to be made for buying stock.

Lockheed Martin’s assessment

That said, every stock has its value, and a quick look at Lockheed Martin’s valuation suggests it’s valued with some pretty positive assumptions in mind.

As the chart demonstrates, the stock price is valued at a forward price-to-earnings ratio of more than 20 times earnings and an enterprise value (market cap plus net debt) to earnings before interest, taxes, depreciation and amortization (EBITDA) , which looks relatively high compared to Lockheed Martin’s recent valuations. Additionally, on a price-to-free cash flow basis, the stock is trading at just under 22 times Wall Street estimates for 2024 free cash flow (FCF).

PE LMT ratio data (before) by YCharts

In short, Lockheed Martin is not considered a mature industrial company with low-single-digit long-term revenue growth prospects and relatively stagnant margins. Instead, the price is approx something more than that.

Where will Lockheed Martin be in three years?

Due to the events of the past two years, the company’s backlog reached a record at the end of 2023, and management expects it to increase in 2024, even as its sales are expected to grow 5% in 2024. However, Wall The Street has Lockheed Martin’s sales growth slowing to 4.2% in 2025 and then 3.7% in 2026. As such, the company is set to return to the kind of low single-digit sales growth that characterizes the industry.

Image source: Getty Images.

That wouldn’t be such a bad result if investors could point to margin expansion, meaning earnings could grow at an accelerated pace. Unfortunately, the future of defense industry margins is a hot topic right now. Be that as it may Boeinghis defense business, RTXIts defense business, or Lockheed Martin itself, major defense contractors are facing margin pressures.

The problems boil down to a combination of rising raw material prices, supply chain difficulties and, more worryingly from a long-term perspective, the execution of problematic fixed-price development projects.

LMT EBITDA Margin (TTM) data by YCharts

The last point may be a structural problem: the US government uses its purchasing power to force defense contractors into fixed-price projects that ultimately squeeze margins.

Where will the margin expansion come from?

Management recently spoke at Morgan Stanley Laguna Conference and CEO Jim Taiclet suggested there could be an opportunity for growth and margin coming from international sales, which currently make up about 27% of sales. He expects international sales to be “anywhere in the next three to five years to have a growth rate that could be anywhere from mid-single digits to high-single digits.”

That’s fine, but he also said international sales come with “close to US government-type margins because they’re under the same contracting regime.” As such, it is reasonable to assume that international sales growth over the next few years will not result in any notable margin improvement.

He also said that after a few years, “they go into country-specific requirements, you’re going to see a lot more direct commercial sales, and that’s where the opportunity for our margins will come in.” However, direct commercial sales are such a small part of Lockheed Martin’s sales that they are unlikely to increase margins significantly.

A stock to buy?

Overall, despite current favorable conditions, Lockheed Martin doesn’t look like a business poised to significantly improve its long-term growth rate beyond the low single-digit range. There are also question marks surrounding its margins and over-reliance on the F-35 program for growth.

As such, the valuation, while reflecting a solid growth environment over the next few years, does not look very attractive.