Shares in defense giant Lockheed Martin (LMT -0.75%) declined 6.8% last year, according to data provided by S&P Global Market Intelligence. It's a notable underperformance compared to the S&P 500's 24.2% gain on the year and reflects that the company entered 2024 with much more uncertainty than it entered 2023.
How Lockheed Martin entered 2023
On the face of it, Lockheed Martin's outlook hasn't changed much. Management started 2023 forecasting full-year sales of $65 billion to $66 billion, segment operating profit of $7.01 billion to $7.11 billion, and free cash flow of $6.2 billion. Fast forward to October, and the updated guidance is for sales of $66.25 billion to $66.75 billion, segment profit of $7.325 billion to $7.375 billion, and free cash flow of $6.2 billion.
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While the numbers are pretty much the same, the reality is that the narrative around the stock has somewhat changed. Going into 2023, investors hoped the supply chain and raw material cost issues might decrease, leading to some margin expansion. In addition, geopolitical tensions and the need to replenish equipment sent to Ukraine led investors to predict a good order environment for defense companies. Furthermore, after slightly missing its target for F-35 deliveries in 2022 (141 versus a target of 148) investors were hoping Lockheed Martin would make progress toward its target of 156deliveries a year by 2025.
How Lockheed Martin entered 2024
Unfortunately, the supply chain issues persisted for defense companies in 2023. The company faced problems with its margins in 2023.
Meanwhile, Lockheed Martin only delivered 98 F-35s in 2023, significantly short of its target. F-35 deliveries have been pushed into 2024 due to issues with a hardware and software upgrade (known as technology refresh 3 or TR-3).
As for orders and the spending environment, while it's true the defense bill has been signed, and a record $886 billion worth of spending has been approved, the question is what's next? While a record figure, it only represents 3% growth over 2022 spending, and the environment might be conducive to defense spending in the coming years.
In addition, management has talked of the potential for some negative impact on margins coming from upfront costs of a classified missile program in development.
Lockheed Martin in 2024
All told, the stock looks pretty much fairly valued. It operates in a low-growth industry whose end market prospects are subject to political risk, and there are issues around F-35 deliveries. Investors will hope for improvement in the issue in 2024 while keeping a close eye on margin progression.
