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Why Lockheed Martin Stock Just Crashed by 12%

By Rich Smith – Oct 26, 2021 at 12:36PM

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Lockheed Martin did beat expectations on earnings -- but they still fell by 65%.

What happened

Shares of defense industry giant Lockheed Martin (LMT 1.24%) tanked Tuesday morning, trading down by 12.1% as of 12:32 p.m. EDT even though the company reported a sizable earnings beat.

It wasn't the bottom line that investors cared about, you see. It was the revenues.

3 red airplanes leaving contrails pointing down

Image source: Getty Images.

So what

Lockheed Martin's earnings plunged by 65% year over year to $2.21 per share in the third quarter -- a result that easily surpassed analysts' consensus projection for earnings of $1.97 per share. The decline was due to the company taking a $1.7 billion noncash pension settlement charge, which depressed its net income by $4.72 per share. Without that charge, it would have earned nearly $7 a share and grown its earnings nearly 11% when calculated according to generally accepted accounting principles (GAAP).  

But again, earnings weren't the issue here. The real problem was that analysts had forecast that Lockheed would report $17.1 billion in sales for the quarter -- but it only had $16 billion.  

Sales declined in all four of Lockheed's main business segments, with space revenues falling by 5%, for example, and missiles and fire control revenues declining by 6%. On the plus side, operating profits grew in all four segments.

Now what

Lockheed management poured salt into the wound when it warned of further sales decelerations ahead. The company's latest guidance is for full-year revenue of only $67 billion. That would still amount to growth of 2.4% from 2020. But its earlier guidance range was for revenues of $67.3 billion to $68.7 billion, so this is slower growth than investors had hoped to see.

Meanwhile, earnings, now hindered by the pension charge, are expected to fall by 8% from last year to $22.45 per share. (Admittedly, that's better than the previous projection, when the top of the range was set at $22.25 per share.) And cash from operations will fall short of management's hoped-for $8.6 billion, coming in closer to $8.3 billion.

If there's any good news to report from Lockheed's report, it's this: Management says that with revenue growth drying up, "we are adjusting our capital allocation strategy with two major objectives," one of which is that "over the short-, mid- and long-term, we will strive to maximize cash flow per share dynamically," including by buying back shares.

Lucky for Lockheed, those shares just got a whole lot cheaper to repurchase.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.

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