Lockheed Martin (LMT) : June 2025

Company Overview

Lockheed Martin Corporation (LMT) is one of the world’s largest defence contractors, renowned for its aerospace and defence systems. The company’s portfolio spans fighter jets (like the F-35 Lightning II), missiles, helicopters, and space systems. As a major supplier to the U.S. Department of Defence and allied nations, Lockheed Martin enjoys a strong position in a stable yet highly regulated industry. Its business model relies on long-term contracts and government budgets, which provide steady revenues but also come with unique risks. In this analysis, we will discuss the key positives and negatives of investing in Lockheed Martin and provide a 10-year discounted cash flow (DCF) valuation to estimate the stock’s intrinsic value.

Positives of Investing in Lockheed Martin

• Robust Demand and Record Backlog: Geopolitical tensions have driven a surge in global defence spending, benefiting contractors like Lockheed Martin. The war in Ukraine and other conflicts have prompted many nations to boost military budgets, sustaining demand for Lockheed’s weapons and aircraft. Lockheed Martin ended 2024 with a record backlog of $176 billion in orders - roughly six years’ worth of revenue - highlighting the significant demand for its defence technology. This backlog provides excellent visibility into future sales and cash flows.

• Leading Market Position: Lockheed Martin’s scale and technological edge make it a primary beneficiary of defence spending. It leads or partners in key programs like the F-35 fighter (a major contributor to its Aeronautics segment) and advanced missile systems, giving it an incumbent advantage on contracts. High barriers to entry and government reliance on established contractors protect their market share. The company also invests heavily in R&D (over $3 billion in 2024) to maintain its technical superiority. positioning it well for new programs (such as next-generation military aircraft and space systems).

• Strong Financial Performance and Shareholder Returns: Despite a one-time charge in 2024 (discussed later), Lockheed’s core performance is solid - 2024 sales grew 5% to $71.0bn. The company produces robust free cash flow (over $5 billion in 2024) and has a history of returning cash to shareholders. In 2024, Lockheed returned $6.8 billion to shareholders via dividends and buybacks. It is a reliable dividend payer with 22 consecutive years of annual dividend increases, currently yielding around 2.8%. Share buybacks have steadily reduced the share count (the board authorised an additional $3 billion repurchase program in late 2024), which boosts earnings per share over time. These shareholder-friendly policies reflect management’s confidence in future cash generation.

• Stable Outlook and Defensive Qualities: Lockheed Martin’s business tends to be less sensitive to economic cycles because defence spending is more linked to security needs and government policy than consumer demand. The company has reaffirmed its 2025 outlook, forecasting modest growth (2025 revenue is guided to $74 billion, up 4- 5%) and healthy segment operating profit margins around 11%. Its broad contract base and long-term funding commitments (including U.S. defence programs and international sales like F-35 deals with allied countries) lend stability to its revenue. For investors, LMT offers the appeal of an industrial stock with defence “safe-haven” characteristics - steady revenues, solid dividend income, and resilience during market downturns.

Risks and Challenges

• Dependence on Government Budgets: Lockheed Martin’s fortunes are tightly linked to U.S. defence budgets and government policies. A change in political priorities, reductions in defence spending, or delays in budget approvals can directly impact its revenue. The company explicitly assumes in its guidance that U.S. federal budgets will be passed on time and programs will remain funded without interruption. A government shutdown or prolonged continuing resolution (a stopgap funding measure) could defer contract awards or payments, straining short-term results. Moreover, over 70% of its sales are to the U.S. government; this concentration means limited diversification if domestic spending falters (though growing international orders help mitigate this).

• Contracting and Execution Risk: Many of Lockheed’s contracts are large, complex projects that carry the risk of cost overruns or technical hurdles. Notably, in 2024, Lockheed took a $2.0 billion pre-tax charge on certain “classified” programs (special government projects) due to higher costs, which slashed its net earnings by $1.5 billion (a $6.16 hit to EPS). This event highlights how execution issues or program delays, for example, development snags in the F-35’s software upgrades, can hurt profitability. Fixed-price contracts, common in defence, put the burden of cost overruns on contractors. Investors must watch for any future write-downs or schedule setbacks on key programs.

• Limited Growth Profile: While defence is stable, it’s not a high-growth industry. Lockheed’s revenue is expected to grow at only a low-to-mid single-digit pace annually in the coming years (analysts project 3-4% revenue CAGR) as mature programs like the F-35 plateau and overall budget growth remains moderate. This means LMT’s investment case leans more on income and stability than explosive growth. If inflation outpaces defence budget increases, real growth could stagnate. The stock already trades at a valuation that assumes steady earnings; any disappointment in growth (or future budgets flattening) could pressure the stock.

• Regulatory and Geopolitical Risks: Being a defence contractor entails regulatory scrutiny and ethical considerations. Lockheed faces oversight on contract pricing, export controls, and antitrust laws (its attempted acquisition of Aerojet Rocketdyne was blocked in 2022). Geopolitical developments can be double-edged: while conflicts drive demand, diplomatic resolutions or arms treaty restrictions could slow orders for weapons. Additionally, some institutional investors avoid defence stocks due to ESG (environmental, social, governance) policies, which can be an overhang on valuation. Finally, rising interest rates have made bonds more attractive relative to equities; with Lockheed’s total debt around $20 billion, higher rates also mean the company’s interest costs and pension liabilities need monitoring, though its credit rating remains solid.

Financial Performance and 10-Year DCF Valuation

Recent Financials: Lockheed Martin’s current financial position is strong. In 2023, the company earned $6.9 billion in net income ($27.55 EPS) on $67.6 billion in sales. 2024 saw revenue rise to $71.0 billion, but net income fell to $5.3 billion ($22.31 EPS) due to the one-time charges mentioned. Excluding those, the underlying 2024 EPS was roughly $28.47, showing that core earnings actually grew. For 2025, management forecasts revenue of $74 billion and EPS around $27, essentially flat with 2024’s normalised level. This guidance reflects stable operations with slight growth, as increasing production (e.g., ramping F-35 deliveries and missile orders) is offset by a lower pension-related gain in 2025. Notably, the company’s backlog of $176 billion provides confidence in the top line. Operating margins are healthy (management projects 11% segment operating margin in 2025), and free cash flow is expected to rebound - Lockheed guides for $6.6-6.8 billion FCF in 2025, up from $5.3 billion in 2024.

DCF Assumptions: We constructed a 10-year Discounted Cash Flow model to estimate Lockheed Martin’s intrinsic value. The model incorporates conservative assumptions reflecting the company’s mature, steady-growth nature:

• Revenue Growth: Starting from the 2024 base of $71.0 billion, we assume revenue grows 5% in 2025 (to $74.5B, consistent with guidance) and gradually tapers to 2% annual growth by the end of the decade. This yields a revenue CAGR of roughly 3% over 10 years, in line with industry forecasts

• Profitability: EBIT margins are assumed to improve slightly from about 11.0% in 2025 to 12.0% by 2030, as efficiency gains and higher volumes slightly offset cost pressures. This is consistent with Lockheed’s historical margin range (approximately 10-12%). The tax rate is set at 18%, reflecting the company’s effective tax rate (benefiting from R&D credits and other incentives)

• Reinvestment: We project capital expenditures at 2.5% of revenue (about $1.9 billion in 2025, rising with sales), slightly above recent depreciation. 2.2% of sales) - implying continued investment in new technologies and facilities. Depreciation & amortisation is modelled at 2.2% of sales, growing in line with the asset base. Working capital needs are relatively modest; we assume incremental working capital will consume about 10% of annual revenue increases (e.g., building inventory or receivables as the business grows). This working capital assumption results in a few hundred million dollars of outflows per year in the model, consistent with recent trends (for instance, working capital growth reduced operating cash flow by $0.5 billion in 2024)

• Discount Rate and Terminal Value: We use a weighted average cost of capital (WACC) of 8%. This reflects Lockheed’s low-beta, government-backed cash flows and moderate debt load - an appropriate discount rate for a stable, large-cap industrial. (For context, some valuations use a WACC in the high-7% range for Lockheed, so 8% is slightly cautious.) For the terminal value in year 10, we apply a perpetual growth rate of 2%, roughly matching long-term GDP/inflation expectations.

In the table, NOPAT is net operating profit after tax. Free Cash Flow (FCF) is calculated as NOPAT plus D&A, minus capital expenditures and investment in working capital. The last column shows the present value (PV) of each year’s FCF discounted at 8%. The terminal value (at the end of 2034) is the present value of all cash flows beyond 2034, calculated using a 2% growth perpetuity - it amounts to $154.5 billion in year-2034 dollars, which discounts to $71.5 billion in present value. Summing the PV of all forecasted cash flows (2025-2034) and the PV of the terminal value gives an enterprise value of approximately $123 billion for Lockheed Martin.

Intrinsic Value per Share: To arrive at equity value, we subtract net debt from the enterprise value. Lockheed Martin has about $20 billion in total debt (roughly $18.5 billion net of cash). Subtracting net debt yields an equity value of roughly $104 billion, which equates to approximately $440 per share (using 235 million shares outstanding). This DCF-derived value is in the same ballpark as the current market price of LMT (around $470 as of May 2025), suggesting the stock is trading near fair value under these assumptions. Investors should note that the DCF outcome is sensitive to the chosen discount rate and growth assumptions --- for instance, a slightly lower WACC (7.5%) or stronger growth could justify a share value closer to or above the current price, whereas any major setbacks or budget cuts would reduce the intrinsic value.

Conclusion

Lockheed Martin offers a compelling mix of stability and shareholder returns, backed by robust defence demand and a record order backlog. The company’s dividend growth streak and buybacks appeal to income-oriented investors, while its leading position in a critical industry provides a defensive quality to portfolios. However, prospective investors should weigh the modest growth prospects and the inherent risks tied to government spending and contract execution. Our analysis indicates that at the current market price, LMT is roughly fairly valued relative to its intrinsic worth, assuming no major surprises in the coming years. In summary, Lockheed Martin represents a solid, blue-chip defence stock - it may not be a rapid growth story, but it can be an attractive long-term investment for those seeking reliable cash flows, a foothold in the defence sector, and exposure to the continued global emphasis on security and defence modernisation. The decision to invest should ultimately align with one’s confidence in sustained defence spending and comfort with the unique risks of the industry.