So far this week, defense contractors General Dynamics (GD -0.46%), Rockwell Collins (COL), Textron (TXT 0.56%), and United Technologies (RTX 0.51%) have all reported earnings to positive, if modest, acclaim on Wall Street. Today, Lockheed Martin (LMT 0.27%) turned out to be the exception to that rule.

Reporting Q4 and full-year 2013 results Thursday, Lockheed confirmed that over the past 12 months it:

  • generated net sales of $45.4 billion, 3.8% less than in 2012;
  • earned 11.1% more profit on these sales -- $3 billion in total, or $9.04 per diluted share;
  • and generated $3.7 billion in free cash flow, 23% more than it reported in "net income," and roughly six times more cash profit than it produced in 2012.

Viewed on their own, these sound like pretty good numbers -- less sales but not an unconscionably lower number, given the constrained defense spending environment. Robust earnings, and even stronger free cash flow. So why did Lockheed Martin's stock fall 4% in response to the news?

The answer is: context. In the context of what analysts expected Lockheed to produce -- weaker Q4 sales of just $11.3 billion (it brought in $11.5 billion for the quarter), but much stronger profits of $1.95 per share (it earned only $1.50) -- Lockheed missed the mark rather badly.

Explaining the earnings miss, Lockheed pointed out how "goodwill impairment charges" plus the expense of paying severance to laid-off workers shaved about $0.88 off its quarterly profit. Pension contributions drained away an additional $0.23 But for these charges, therefore, Lockheed almost certainly would have "beat earnings for the quarter."

What it means to you
In short, Lockheed Martin's report really wasn't as bad as it looked on the surface. Indeed, given all the costs it booked during the year's final quarter, it's pretty remarkable that the company managed to emerge from 2013 $3.7 billion richer than it went into it.

Going forward, it is guiding investors to expect 2014 sales of at least $44 billion (down 3% against 2013) and potentially as much as $45.5 billion (essentially flat against 2013). Earnings are expected to grow in any case -- perhaps as high as $10.55 per share. Free cash flow, assuming capital expenditures similar to what we saw in 2013, should be at least as good as what it produced in 2013 -- roughly $3.8 billion.

At a projected valuation of 12.6 times free cash flow, therefore, the stock looks somewhat overpriced for long-term growth-rate expectations of 7% and a 3.5% dividend yield. It's not vastly overpriced by any means, but neither is Lockheed Martin stock a bargain.