Is Lockheed Martin Stock a Buy?

Lockheed Martin (LMT -0.75%) stock dropped after the defense company's recent results, but is that creating a buying opportunity? After all, the company is involved in multiyear programs with highly reliable customers in an environment of heightened geopolitical tensions. Let's look at the results so you can make an informed decision about the matter.

Disappointing earnings

The earnings report was not good. I want to highlight three specific points, the first being seen in the table below. While sales growth is in the kind of low single-digit growth you might expect from the defense industry, the company's declining profit margin results in a decline in its segment profit.

For reference, segment operating profit doesn't include unallocated income and expenses. Still, even when including these figures (consolidated operating profit), management expects profit to decline from $8.5 billion in 2023 to a range of $8.155 billion to $8.355 billion in 2024.

Data source: Lockheed Martin presentations.

Lockheed is not alone in experiencing significant margin pressure. In fact, it's a common theme across the defense industry. For example, RTX's defense business, Raytheon, reported an adjusted operating profit margin of 9.2% in 2023, down from 9.9%, and its adjusted operating profit declined by $64 million in 2023. It's a situation that appears to be deteriorating because, in the third-quarter earnings report, management said Raytheon's adjusted operating profit would increase by $25 million to $75 million.

RTX has lowered its expectations to 2025 for Raytheon. Meanwhile, Boeing continues to suffer losses in its defense segment, with management already intimating it (Boeing defense, space, and security) might contribute less than expected to its 2025/2026 targets.

Turning back to Lockheed Martin, management's outlook for 2025 isn't inspiring either. Deutsche Bank analyst Scott Deuschle asked whether investors should take the "jumping off point" for margin in 2025 as the 10.5% forecast for 2024 or the higher figure for 2023. CFO Jesus Malave replied, "I think you do have to start at the 10.5% to jump off," before saying it would be a "gradual march back up" before the company got back to an 11% margin again. He implied that the margin would not be more than 10.7% in 2025.

Classified missile program

More disappointing news about the company's margin came from headwinds related to the development of a classified missile program. Previously, management had told investors the program could result in 25 basis points to 50 basis points (where 100 basis points equates to 1%) of margin headwind in 2024.

Fast-forward to the recent results, and Malave confirmed it would be a 50-basis-point hit. While the program is ultimately intended to be profitable, the up-front hit to margin comes at the high end of management's initial expectations.

F-35 deliveries

There was more bad news on the F-35 combat aircraft. Having fallen behind its prior expectation of delivering 100 to 120 F-35s in 2023 by only delivering 98, management told investors it would only deliver 75 to 110 in 2024. The reason is that its technology refresh upgrade (TR-3) on the F-35 will likely complete certification in the third quarter rather than the second quarter, which management is targeting.

Image source: Getty Images.

Is Lockheed Martin stock a buy?

The ongoing margin pressures, up-front program costs, and operational disappointments are significant issues. In addition, perhaps it's a good idea to reflect on CEO James Taiclet's observation that the government has "been taking advantage of that monopsony power, if you will, over the industry."

This environment has led to defense contractors taking on excess risks on cost and pricing, resulting in the current problems with cost overruns, project delays, and severe margin pressure. If that's the case, then it appears there's a structural problem with margins in the defense industry. Combined with Lockheed's difficulties in 2024, the stock is worth avoiding.