Cloudy forecasts for Lockheed Martin and its F-35 fighter jet. Photo: Wikimedia Commons.

Lockheed Martin (NYSE:LMT) reported Q4 and full-year 2014 earnings Tuesday morning. The news was not good -- and the shares are down because of it. Here's your after-action report, in simple bullet-point form:

  • Q4 sales of $12.5 billion exceeded estimates...
  • but Q4 profits from continuing operations of $2.82 per share missed. Consequently...
  • full-year sales ($45.6 billion) beat estimates as well, while full-year earnings ($11.21) missed.
  • And free cash flow for the year, at an even $3 billion, both lagged reported net income of $3.6 billion by 16.4%, and declined 18.5% year over year.

So, it's little wonder that as we look up Lockheed Martin's stock ticker this afternoon, we're seeing the shares slide more than 2%. Adding to investor concerns is the fact that, in projecting sales and earnings for the rest of 2015, Lockheed Martin foresaw:

  • Sales ranging from $43.5 billion to $45 billion (i.e., down from 2014 levels, even in the best-case scenario)
  • Profits per diluted share of $10.80 to $11.10 (likewise down year over year)

That's the exact opposite of what investors, who've been told by analysts to expect annualized earnings growth of 11.4% out of Lockheed over the next five years, wanted to hear. And yet... the news isn't all bad.

Cash is king
Investors appear to be down on Lockheed Martin stock today. But, in fact, I see at least two bright points in Lockheed's forecast. First, the $2 billion in pension contributions that Lockheed says it had to make in 2014 won't be repeated in 2015 -- or in 2016 or 2017, either. As Lockheed explained in its earnings release: "The Corporation does not plan to make contributions to its qualified defined benefit pension plans in 2015 through 2017 because none are required using current assumptions." That alone will be a nice boost to earnings going forward.

It will also help with the cash.

Lockheed's 2015 forecast may call for a decline in profits as calculated under generally accepted accounting principles (GAAP). But the company's looking to produce a bumper crop of cash from operations this year -- $5 billion or more. Assuming capital spending remains at its current rate ($840 million or thereabouts), that should work out to free cash flow of roughly $4.2 billion this year -- 40% more cash profit than Lockheed generated in 2014.

What it means to investors
Relative to Lockheed Martin's current market capitalization of $59.9 billion, that works out to a price-to-free cash flow ratio of about 14.3 for Lockheed Martin stock. Factor in cash and debt, and the enterprise value-to-free cash flow ratio is 15.4.

If you ask me, neither of those valuations looks unreasonable for a stock paying a 3% dividend yield, and growing at 11.4% annually. Of course, that still requires Lockheed Martin to stop shrinking, and start growing again.

Which is always the trick.