Are defense stocks the right pick for your portfolio? Today we look at Lockheed Martin stock. Image source: Getty Images.

If it's earnings season (and it is), then it must be time for defense giant Lockheed Martin (LMT -1.26%) to "beat" earnings estimates (and it did).

Earlier this morning, the nation's largest pure-play defense contractor reported fiscal Q2 2016 numbers that beat analyst estimates with a stick. Expected to report $2.93 per share on $12.56 billion in sales, Lockheed instead announced profits of $3.32 per share and $12.9 billion in revenue. Investors seem pleased with the result, and bid Lockheed shares up 1%.

The news

 Beating analysts wasn't all Lockheed Martin did In Q2 either. Year over year:

  • Quarterly sales grew 11% to $12.9 billion.
  • Quarterly profits rose 13% to $3.32 per share.
  • And Lockheed generated a total of $2.8 billion in positive free cash flow for the first six months of the year -- nearly 50% better than the $1.9 billion generated in last year's first half.

Lockheed also raised its guidance for the rest of this year. Revenue is now expected to be no less than $50 billion (and perhaps as much as $51.5 billion). Operating cash flow predictions have been bumped up to $5.5 billion (implying perhaps $4.5 billion in free cash flow at the rate capital expenditures have been running recently). Profits are expected to come in somewhere in the range of $12.30 per share, nearly 6% better than what management was predicting just three months prior.

There's certainly not much to dislike in all that.

What's not to like

As for "bad news," well, there are the profit margins to start with. With Sikorsky, acquired from United Technologies (RTX -0.90%) back in November, now firmly under Lockheed Martin's corporate umbrella, that division's weak profit margins are continuing to drag Lockheed's overall numbers down. Operating margin for the fiscal Q2 declined 30 basis points to 12.1% compared to where Lockheed was at a year ago.

And with margins on the downturn, Lockheed Martin's earnings went up faster than sales grew only because the company bought back a lot of shares. That concentrated corporate profits among fewer shares outstanding. Buying back shares is certainly one valid way to grow per-share profits. But with Lockheed Martin stock trading near its 52-week high, such "growth" doesn't come cheap.

Is Lockheed stock cheap or isn't it?

Speaking of "cheap," Lockheed Martin stock really isn't. Priced today at 20.9 times trailing earnings, 15.5 times free cash flow, and 1.6 times trailing revenues (all figures courtesy of S&P Global Market Intelligence), Lockheed Martin stock really costs quite a pretty penny.

Meanwhile, analysts who follow the stock closely predict Lockheed Martin can't keep growing through buybacks indefinitely. Indeed, long-term growth estimates for the stock call for 5-year annual earnings growth of only 6%. Even with a generous 2.6% dividend yield to help out, that's a single-digit profits "total return" we're looking at, on a stock that trades in the double digits for both P/E and P/FCF.

Long story short, Lockheed Martin remains a fabulous company and a growing business. It's doing better than a lot of investors expected it would -- but yes, its stock costs too darn much to buy.