Geopolitical tensions have been on the rise in recent years, especially with the conflicts in Ukraine and the Middle East. One might expect that defense contractors have delivered outsize returns, but that just hasn't been the case.
Take Lockheed Martin (LMT 1.65%), for example. From the start of 2023 until just a few weeks ago, the stock hadn't gained any ground for investors. The company has faced challenges, including declining profit margins and a pause in deliveries for its F-35 jets amid technological upgrades.
Things are beginning to look up for the defense contractor. Lockheed recently reported solid second-quarter results, and the United States has resumed taking deliveries on its jets after a nearly year-long pause. Here's what you need to know about Lockheed and why now may be a good time to jump on board.
Lockheed Martin could be turning the corner
Lockheed Martin designs and develops advanced technology for the U.S. government and its allies, and is one of the world's largest defense contractors by total sales. According to Bloomberg Government, Lockheed's $46 billion of contract obligations make it the largest defense contractor in the U.S., outpacing RTX and General Dynamics.
The company is well positioned, as geopolitical tensions have risen in recent years. However, Lockheed and other defense contractors have dealt with ongoing supply chain issues and rising raw materials costs. They may also be having trouble delivering on fixed-priced contracts procured before inflationary pressures surfaced in the economy. As a result, margins have come under pressure.
LMT Operating Margin (TTM) data by YCharts
On top of that, software delays have resulted in a nearly year-long pause in delivering its F-35 fighter jets to the U.S. government. Lockheed has been upgrading its jets under a program called Technology Refresh 3 (TR-3), which brings a new cockpit display and other improvements.
Some have referred to TR-3 as the "IT backbone" for future enhancements to the fighter jet. The upgrades are part of a broader plan to improve the technology and implement Block 4, which will give the jets the latest and greatest cutting-edge technology.
Lockheed got good news last month as the U.S. government has resumed taking delivery of F-35 jets after pausing deliveries for several months. The company must continue to update the software, but it has made enough progress to move its stored jets and expects to deliver 75 to 110 aircraft in the second half of this year.
What's next for the defense company
Things are looking up for the defense company, as seen by the stock's recent 21% surge over the past month. In addition to resuming deliveries on its F-35, the company reported solid second-quarter results, beating analysts' estimates for both sales and earnings. The company also raised its full-year outlook, raising sales estimates by 2.5% to $71 billion and increasing its earnings-per-share forecast from $26 to $26.35 at the midpoint.
Analysts expect its margins and free cash flow to get a boost through 2026 as resuming deliveries of its F-35 jets removes one of the most significant overhangs on Lockheed. According to The Fly, Baird recently raised its price target for the company and said there were "early indications of a multi-year turnaround story unfolding."
Buy, sell, or hold Lockheed Martin?
Lockheed Martin has faced some headwinds over the past couple of years from margin compression and delivery delays, resulting in a lackluster stock performance for investors. Following the recent stock run-up, Lockheed trades at 20.2 times earnings, which is slightly above its 10-year average of 19.9.
LMT PE Ratio data by YCharts
Lockheed Martin isn't cheap, but it isn't expensive, either. However, things are looking up, and today it could be a good buying opportunity for long-term investors. It is well positioned, and demand for its other programs, like its PAC-3 air defense missile and high mobility artillery rocket system (HIMARS), remains high amid heightened geopolitical tensions.
With a backlog of $160 billion, more than two times its annual revenue, Lockheed should continue to benefit from its position as a top U.S. government defense contractor.
