Lockheed Martin shares are up 21% this year. Can the Rally continue?

Actions of Lockheed Martin (LMT -0.01%) have been able to sustain a great rally this year through the recent round of extreme market volatility. The stock is up about 21% in 2024, near an all-time high even though S&P 500 has retreated more than 7% from its peak in recent weeks.

This dynamic is excellent news for investors, suggesting that stocks remain well supported by strong fundamentals and a positive outlook. In this case, the defense sector bus is capturing a boom in demand from ongoing geopolitical conflicts as a tailwind for earnings.

Could Lockheed Martin make a good addition to your portfolio? Here’s what you need to know.

A digital transformation that drives growth

A major theme for Lockheed Martin has been the ongoing “21st Century Security” initiative to accelerate the integration of more advanced technologies into its product portfolio.

The move is important because 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 provide more diversified growth with increased profitability.

The strategy seems 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 year-ago quarter. Revenue of $18.1 billion was up 9% year-over-year and nearly $1 billion above the average Wall Street estimate. Free cash flow movement is even more impressive, coming in at $1.5 billion, nearly double Q2 2023’s $777 million.

Management cites a boost from the rotary and mission systems segment, where Q2 sales were up 17% from last year. This group includes more than 1,000 helicopter, radar and intelligence controls programs, proving critical in the Eastern European and Middle East theaters of operation. The missile and fire control business was also strong, with sales up 13% in the quarter.

Perhaps the biggest development for Lockheed Martin this year is the restart of deliveries of F-35 jets to the US Department of Defense, which have been stalled for the past year pending necessary hardware and software upgrades. An increase in production as part of the company’s digital transformation strategy is expected to lead to an improved growth outlook for the core Aeronautical segment.

In terms of guidance, trends were good enough for the company to raise full-year estimates. Lockheed Martin now expects 2024 EPS of $26.10 to $26.60, up from its previous estimate of $26 on sales of $70.5 billion to $71.5 billion, up about 6% YoY of 2023.

Image source: Getty Images.

A leader in the defense sector at an attractive valuation

The appeal of Lockheed Martin as an investment opportunity begins with its sector leader, in an area of ​​the market that has gained importance in recent years, going back to the beginning of the Russia-Ukraine conflict in 2022 and including the more recent situation in Red. Great.

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 around the world.

I think the stock trading at 21 times 2024 EPS estimates still offers good value alongside peers such as RTX, Northrop Grummanand General dynamicswhich are priced at a similar average earnings premium.

The key here is that positioning Lockheed Martin in high-profile programs like the F-35 fighter jet or the Sikorsky UH-60 Black Hawk helicopter could justify an even higher premium. Ultimately, the company’s ability to raise margins as it becomes more high-tech should allow the stock to trade at a valuation above its peer group over time.

PE LMT ratio data (before) by YCharts

Deciding on Lockheed Martin stock

There’s a lot to like about Lockheed Martin, with a long history of generating positive returns for shareholders. The combination of a steady growth outlook with solid overall fundamentals warrants a buy rating for the stock in my opinion.

Investors interested in stocks might consider adding a position to a diversified portfolio. I like the strategy of dollar cost averaging, buying stocks over time to help mitigate short-term volatility.