Lockheed Martin LMT recently raised its quarterly dividend by 5%, effective with its Dec. 27 payout. In fact, this wide-moat aerospace and defense contractor has increased its dividend for 22 years in a row. The stock recently fell into undervalued territory after Lockheed reported that cost overruns on two programs had lowered operating profit. While questions remain about whether the new Department of Government Efficiency could limit future programs, we think the stock of this high-quality dividend payer looks attractive. Lockheed is one of Morningstar chief US market strategist Dave Sekera’s 3 Stocks to Buy Before They Bounce Back.
Lockheed Martin derived nearly 75% of its $71 billion in 2024 sales servicing contracts from the US Department of Defense and stands to operate the largest defense procurement program ever awarded—for the F-35 fighter jet—through the 2060s. Biggest isn’t always best, but Lockheed does benefit from the sheer scale of its tens of billions of dollars of contracts that provide defined decadeslong revenue and profit streams. Lockheed should benefit from recent and foreseeable increases in US defense spending, driven in the short term by orders to resupply munitions expended in Ukraine. Longer term, the Pentagon has prioritized modernization of the military’s ability to counter aggression from multiple so-called great power rivals, namely China and Russia, while also managing threats from terrorism and hot spots like Iran and North Korea.
Key Morningstar Metrics for Lockheed Martin
- Fair Value Estimate: $530
- Star Rating: 4 Stars
- Economic Moat Rating: Wide
- Uncertainty Rating: Medium
Economic Moat Rating
The durability of economic profits in the defense sector may seem paradoxical: Defense contractors invest billions to generate products on the cutting edge of technology, and unit pricing for their products is designed to decline over time. What’s more, these companies primarily sell to a single buyer—one with rapidly evolving needs, a tendency to change product requirements, and intermittent squabbles over the bill. Despite these challenges, we observe that wide moats are prevalent in the defense business. They exist because of significant intangible assets. First among these is the extreme product complexity that thwarts new entrants, bolstered by decadeslong product cycles, contract structures that reduce risk for the contractor and lock out alternative suppliers, and a risk-averse customer facing significant time and risk to switch products.
Read more about Lockheed Martin’s moat rating.
Fair Value Estimate for Lockheed Martin Stock
Our fair value estimate is $530 per share, which implies a price/2025 estimated earnings multiple of 19.7 times and an enterprise value/2025 EBITDA multiple of 13.8. We forecast revenue will grow at a 2.5% compound average rate during 2024-29 as moderating defense spending flows through to the top line. We think the missiles and space segments will offer the most growth in the medium term, around 3.3% annualized. Our midcycle operating margin forecast, including ongoing recovery from the US government of operating pension costs, is 12.3%. We anticipate increasing capital expenditures to build out manufacturing capabilities for the company’s classified businesses. We think a below-average 7.5% cost of equity and a 7.1% weighted average cost of capital are justified for this steady business.
Read more about Lockheed Martin’s fair value estimate.
Risk and Uncertainty
The major risks we see for Lockheed are geopolitical risks relating to the defense budgeting and sales process and execution risks. In 2024, 26% of the company’s sales went to international customers, all subject to approval by the US government. This presents geopolitical risk if alliances break down or the US decides against sharing a particular item or technology. Although US defense spending has risen recently, as has that of allied partners, the risk remains that defense budgets get caught up in political wrangling. Lockheed also faces execution risk related to its contracts. Supply chain issues and production challenges could continue to prevent it from meeting deadlines or other contractual obligations, affecting costs and putting Lockheed’s customer relationships under strain.
Read more about Lockheed Martin’s risk and uncertainty.
Lockheed Bulls Say
- Lockheed Martin’s prime contractor role on the F-35, the largest weapon program in history, should deliver stable revenue for decades through procurement and maintenance.
- Geopolitical tensions have increased considerably due to the Russia-Ukraine war and escalating conflict in the Middle East. We expect the US will increase defense spending to deter further conflict.
- Defense prime contractors operate in an acyclical business, which could offer some protection if the US enters a recession.
Lockheed Bears Say
- Lockheed Martin depends on US military funding for its sales, which is an inherently political and thus uncertain process.
- There is a risk that upstarts like SpaceX or Anduril will threaten incumbents’ oligopoly in space contracts or autonomous aircraft.
- Lockheed faces operational execution risk with the F-35 program, which accounts for roughly 30% of sales. While program costs have been managed recently, negotiations with the Defense Department over future lots have dragged out and may imperil funding.
This article was compiled by Susan Dziubinski and Sylvia Hauser. Data as of Feb. 5, 2025.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
