With a land war in Europe, a Red Sea conflict escalating by the day, and China's naval buildup causing nerves to jangle across Southeast Asia, you might think 2023 would have been a great year to be in the defensive weapons business. For defense contracting giant Lockheed Martin (LMT 0.32%), however, it was rather ho-hum.
Reporting fourth-quarter (and therefore full-year) results last week, Lockheed Martin was forced to admit that 2023 sales inched up only 2.4% in comparison to 2022, to $67.6 billion. On profit, the news was better. As calculated according to generally accepted accounting principles (GAAP), Lockheed earned $6.9 billion, or $27.55 per share, compared with $5.7 billion, or $21.66 per share, in 2022 -- 21% year over year growth, or 27%, depending on how you look at it.
But as regards cash flow, and more importantly free cash flow, the news was depressing again. Operating cash flow grew barely 1%, and free cash flow was up less than 2% at $6.2 billion -- and 10% below reported net income, indicating less than stellar quality of earnings.
Ho. Hum.
NYSE: LMT
Key Data Points
Ho-hum for another year
Wall Street was most decidedly not impressed with these numbers, and Lockheed Martin stock fell 4% on the day they were announced -- then continued to slide all week long, ending up down more than 6% post-earnings.
It probably didn't help that Lockheed's forecast for 2024 wasn't clearly any better than the numbers it put up in 2023. Turning to guidance, Lockheed said it expects to book between $68.5 billion and $70 billion in sales this year -- 3.6% growth in the best-case scenario, and potentially as little as 1.3%. Free cash flow will be flat to down at about $6.2 billion. Profit, meanwhile, will fall to a range of from $25.65 to $26.35 per share, below both actual results for 2023 and analysts' forecasts for 2024.
Yes, you read that right: In a bull market for defensive weapons, Lockheed Martin says it's going to earn less money this year than it did last year.
What's wrong with Lockheed Martin stock?
Why is this?
Demand doesn't seem to be the issue. Lockheed CEO Jim Taiclet confirmed the company is seeing "continued strong demand for our all-domain portfolio of advanced defense tech solutions." Backlog of orders hit a new record of $160.6 billion at the end of 2023, rising 7% year over year -- nearly three times as fast as sales.
It just seems to be taking a little while for that growth to appear. In a post-earnings conference call, company CFO Jay Malave also confirmed that Lockheed's book-to-bill ratio was about 1.1 in 2023, supporting the thesis that sales are still growing, although there's a "long cycle nature [to] Lockheed Martin's" defense sales. And with Lockheed's revenues already at all-time highs, and government budgets stretched all around the world, there simply may not be a lot of room left to grow no matter how strong the demand is.
At the same time, Lockheed Martin's profit margins on its sales look similarly stretched. At 13.4% for the year, they're within a whisker of the 13.6% margin high reached in 2020, suggesting that profit, too, may have nowhere to go but down from this point. Indeed, in comments on the conference call, Malave seemed to be telling analysts to expect 10.5% (possibly net) margin in 2024, rising to not much more than 11%, and not sooner than 2026.
Is Lockheed Martin stock a buy?
Big picture, therefore, here's what I think we're looking at with Lockheed Martin stock. At 15.5 times earnings the stock looks cheap -- especially when compared with an S&P 500 that's selling for nearly 27 times earnings. However, revenue is at historical highs and growth is slowing, while profit margin is near an all-time peak -- and falling.
That doesn't sound like a scenario in which investors can count on seeing profit grow much at all from here on out. And indeed, according to a poll conducted by S&P Global Market Intelligence, most analysts are predicting Lockheed's earnings won't grow much faster than 3% annually over the next five years -- barely surpassing the rate of inflation.
Even in the midst of what look like they should be a bull market conditions for defense companies, I wouldn't buy Lockheed Martin stock today.
