Lockheed Martin: Buy, Sell or Hold?

Geopolitical tensions have risen in recent years, particularly with the conflicts in Ukraine and the Middle East. One might expect defense contractors to have delivered huge returns, but that simply wasn’t the case.

Take it Lockheed Martin (LMT -0.52%)for example. From the start of 2023 until just a few weeks ago, stocks had not gained ground for investors. The company has faced challenges, including shrinking profit margins and a pause in deliveries for its F-35 jets amid technology upgrades.

Things are starting to look good for the defense contractor. Lockheed recently reported solid second-quarter results, and the United States resumed deliveries of its planes after a nearly year-long hiatus. Here’s what you need to know about Lockheed and why now might be a good time to get on board.

Lockheed Martin could be turning the corner

Lockheed Martin designs and develops advanced technology for the US government and its allies and is one of the world’s largest defense contractors by total sales. According to Bloomberg Government, Lockheed’s $46 billion in contract obligations make it the largest U.S. defense contractor, surpassing RTX and General dynamics.

The company is well positioned as geopolitical tensions have risen in recent years. However, Lockheed and other defense contractors have faced ongoing supply chain problems and rising raw material costs. They may also have difficulty delivering on fixed-price contracts purchased before inflationary pressures appear in the economy. As a result, margins have come under pressure.

LMT Operating Margin (TTM) data by YCharts

In addition, software delays led to a nearly year-long hiatus in the delivery of its F-35 fighter jets to the US government. Lockheed has upgraded its planes under a program called Technology Refresh 3 (TR-3), which brings a new cockpit display and other improvements.

Some have referred to the TR-3 as the “IT backbone” for future improvements to the fighter. The upgrades are part of a larger plan to improve technology and implement Block 4, which will provide the aircraft with the latest and greatest cutting-edge technology.

Lockheed received good news last month as the US government resumed delivery of F-35 jets after halting deliveries for several months. The company must continue to update the software, but has made enough progress to move its stockpiled planes and expects to deliver between 75 and 110 planes in the second half of this year.

What’s next for the defense company

Things are looking up for the defense company, as seen by the stock’s recent 21% rise in the past month. In addition to resuming F-35 deliveries, the company reported solid second-quarter results, beating analysts’ estimates for both sales and earnings. The company also raised its full-year outlook, raising sales estimates by 2.5% to $71 billion and raising its earnings per share forecast to $26.35 from $26. dollars in the middle.

Analysts expect margins and free cash flow to get a boost through 2026 as the resumption of deliveries of its F-35 jets removes one of Lockheed’s most significant overruns. According to The Fly, Baird recently raised his price target for the company and said there are “early signs of a multi-year recovery story.”

Buying, selling or owning Lockheed Martin?

Lockheed Martin has faced some difficulties over the past two years due to margin compression and delivery delays, resulting in the stock underperforming for investors. Following the stock’s recent rally, Lockheed trades at 20.2 times earnings, which is slightly above its 10-year average of 19.9.

LMT PE report data by YCharts

Lockheed Martin is not cheap, but not expensive either. However, things are looking up, and today could be a good buying opportunity for long-term investors. It is well positioned, and demand for its other programs, such as the PAC-3 air defense missile and the High Mobility Artillery Missile System (HIMARS), remains high amid heightened geopolitical tensions.

With $160 billion in stock, more than twice its annual revenue, Lockheed should continue to benefit from its position as the US government’s top defense contractor.