Lockheed Martin (LMT 0.31%) reported its fiscal 2022 first-quarter earnings on Tuesday and investors weren't terribly happy with what they saw. The stock price is down about 4% in the three trading days since earnings came out, but shares of the defense contracting giant are still trading markedly higher than they were before the war in Ukraine began. The stock is trading at the levels they were at the start of March.

What did Lockheed management say to get investors so upset, and what does the future hold for Lockheed Martin stock? Let's take a look.

F-16 fighter jet seen head-on.

Image source: Getty Images.

Lockheed Martin Q1 earnings by the numbers

Lockheed Martin reported $15 billion in sales for its fiscal first quarter (ended March 27), down a disheartening 8% from one year ago and below analyst expectations.

Operating profits also fell, down 11%, and net income declined 6%, although earnings per share were off only 2% at $6.44 per share. Luckily for Lockheed, this was a smaller decline than Wall Street had forecast -- to $6.21. However, it appears Lockheed only managed to avoid an earnings miss (in addition to the sales miss) because it bought back 4% of its stock. This concentrated profits among fewer shares outstanding, therefore limiting the decline in per-share profits (in other words, those profits are weaker than they look.)

Lockheed CEO James Taiclet put a brave face on the results, calling them "a solid start to the year," and saying Lockheed achieved "margin expansion" in the quarter "despite recent COVID-surge impacts on our operations and supply chain."

Not all margins expanded, though. While Lockheed's net margin did inch up 30 basis points -- largely because of a smaller tax bill, and a fair value adjustment to some of Lockheed's investments -- operating profit margins at the defense giant actually contracted by about 50 basis points to 12.9%.

Lockheed free cash flow was down 22% from 2021

Another reason Lockheed's earnings are weaker than they at first appear is tied to an apparent decline in the quality of Lockheed Martin's earnings. Lockheed reported $1.7 billion in net income for its first quarter of the year. But despite the CEO's boasting of "free cash flow above our expectations," free cash flow at Lockheed actually plunged 22% year over year -- twice as fast as the decline in operating profits -- to $1.1 billion.

That means that for every $1 in net income Lockheed claimed for the quarter, its actual cash profits were less than $0.66.

Lockheed Martin also doesn't anticipate closing this gap between GAAP earnings and actual free cash flow entirely later this year. Wrapping up its earnings release, Lockheed Martin management forecast that the company will collect $66 billion in sales this year and earn about $26.70 per share on those sales (which is roughly $7.2 billion in net income based on the current share count) -- but generate only $6 billion in free cash flow, or about $0.83 per $1 in reported profit.

Was there any positive news in Lockheed's report?

So far the news has been pretty dreary for Lockheed Martin -- not at all what I imagine investors were hoping to see a defense contractor report in the middle of a shooting war, which has increased demand for Lockheed's products both here and in Europe.

There were a couple of bright spots in Lockheed's report. Of particular note was the company's space business, the only business segment at Lockheed to show an improvement in operating profits (up 8%), despite its revenues declining (down 15%). Conversely, aeronautics (fighter jets) saw profits slip (down 2%) but revenues rise (up 0.2%). These were mixed blessings, to be sure, but given that Lockheed's missiles division and its helicopters division both saw revenues and profits slide, investors may have to take good news where they can find it this week.

All in all, Lockheed's Q1 results were surprisingly weak and not at all the kinds of numbers I'd want to see in a company selling for 20 times earnings, or carrying a historically high price-to-sales ratio of 1.9. Unless Lockheed can turn things around and grow both its revenue and its profits faster than it's promising to do, this stock looks more like a sell than a buy to me.