By now you’ve heard the news: Lockheed Martin (NYSE: LMT) reported its third-quarter earnings last week, and the stock is down 11% since that news came out. What you may not know is why Lockheed stock sank so quickly — and so far.
Lockheed Martin is the world’s biggest pure-play defense stock, and a giant of the aerospace industry. The problem is that in Q3, it didn’t perform particularly well in either aero… or space.
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Considering the warning I gave regarding defense stock valuations and Lockheed Martin’s valuation in particular earlier this month, perhaps this shouldn’t come as a surprise. With a sky-high 2.3 times enterprise value-to-sales valuation ahead of earnings, which was well above its historical average, Lockheed Martin stock was priced for perfection.
It failed to achieve that perfection last week.
Overall, the company grew both sales and nearing only 1% year over year in Q3. In fact, total net income declined a bit — only per-share earnings grew. Free cash flow at the defense giant tumbled 18% year over year. What’s really interesting, though, is that the two areas where you’d expect an “aerospace” specialist to excel — Lockheed’s aeronautics and space businesses — were the two areas where Lockheed’s performance was weakest.
Rising costs and delayed deliveries in the company’s F-35 Lightning II fighter jet division contributed to a 3.5% revenue decline in Lockheed’s biggest business, aeronautics, although profit margins improved a bit. Space was another disappointment, being the only other Lockheed division to suffer a sales decline, albeit only 1%, and with improved margins.
Where Lockheed enjoyed growth was in its missiles division (sales up 8%) and in rotary (such as helicopters), where sales rose 6%. Profit margins also improved in the missile division, while they contracted in rotary.
Lockheed management blamed “lower volume on production contracts as a result of delays in receiving additional contractual authorization and funding” for costing it $480 million in sales of its F-35 fighter jet in Q3. On the plus side, better-than-expected sales of C-130 transports and F-16 fighters helped to make up the difference. (And Lockheed sales can expect to get a lot more help from its F-16 program going forward).
That being said, sales delayed while Lockheed works out the contract details with its government customer are not the same as sales lost. In the worst-case scenario, they’ll take a bit longer to materialize, but this shouldn’t upset Lockheed’s long-term revenue stream from the F-35.
I’m actually a bit more worried about the space side of things. On the one hand, Lockheed seems to be making some progress here, recently acquiring Terran Orbital for a bargain price, and securing a multi-billion-dollar Space Force contract in the process. The continued improvement in operating profit margins for the space business (now 9.9% year to date) is also encouraging. And space profit margins could continue improving over time as United Launch Alliance’s Vulcan program ramps up. Lockheed owns 50% of ULA; Boeing(NYSE: BA) owns the other 50% and takes half the profits.
(Sidenote: Lockheed noted that its share of profits from ULA amounted to just $5 million on the one rocket launched in Q3 2024, versus $10 million on the single rocket launched in second-quarter 2024, and $15 million for the one rocket launched in Q3 2023. Investors curious about profit margins at ULA can multiply those numbers by two to learn the total profit earned by ULA before Lockheed took its cut).
On the other hand, space got short shrift in the company’s post-earnings conference call. Lockheed noted its recent win of $3.2 billion in contracts to work on Trident missile programs for the U.S. Navy ($2.1 billion of which will go to Lockheed’s space division), and a further $300 million award to build mapping instruments for the National Oceanic and Atmospheric Administration (that could expand to $600 million). But otherwise, the company was silent on space work, and this division remains Lockheed Martin’s smallest and least profitable.
Combined with continued worries in the media over the rising cost of the Space Launch System rocket, which includes an Orion capsule built by Lockheed Martin, and calls for SLS to be replaced by SpaceX’s Starship as a transport rocket to the moon, “space” appears to be the weakest link at Lockheed. It’s not the only reason I’m staying away from the stock — valuation is a bigger concern for me.
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