Lockheed Martin (NYSE:LMT) recently released its fourth-quarter (Q4') results, with management offering fiscal 2025 guidance below analysts' expectations. The stock price declined following this development and, although Lockheed Martin's valuation appears attractive, the company's prospective growtheven under a bullish scenariodoes not appear sufficiently robust to justify an allocation at present. While my valuation model indicates a 26% margin of safety, the five-year compound annual growth rate stands at just 12.6%. It also seems unlikely in the short term that the market will re-rate Lockheed Martin's share price to fair value, given that most investors hold it for the long term rather than a medium-term window of around five years. Regrettably, from a longer-term perspective, there is substantial uncertainty facing Lockheed Martin as artificial intelligence (AI') defense competition intensifies, and the United States' regulatory and federal fiscal environment shifts under the new Trump administration.
Q4 earnings analysisLockheed Martin, the United States' leading supplier of defense equipment, recently published its Q4 2024 results. Management observed: In 2024, sales grew 5% year over year, and our backlog of $176 billion reached yet another record. The company also reported double-digit growth in free cash flow per share. Each of its four business areas saw backlog increases and ended the year with a book-to-bill ratio exceeding 1.
Given that management reiterated the company's focus on free cash flow and free cash flow per share, and that Lockheed Martin sometimes returns over 100% of its free cash flow to shareholders, investors appear well-positioned. This is particularly notable in light of the 2.91% forward dividend yield and a share repurchase program that saw $3.7 billion in shares bought back in 2024.
Many will be curious about the impact of the newly formed Department of Government Efficiency on Lockheed Martin. According to management's statements in the earnings call, this department's heightened contract oversight could benefit the procurement process overall. Streamlined regulations are therefore expected to favor the best available technology, putting pressure on established defense contractorsincluding Lockheed Martinto optimize operations. Lockheed Martin is already well placed to seize these opportunities.
Underlying cold war dynamics between the United States and China remain a key driver, as reflected in Lockheed Martin's statement during the Q4 earnings call: China has increased production of the J-20 to over 100 units per year. We're doing 156. We're ahead of them. Geopolitical tensions in Ukraine and the potential for conflict around Taiwan also continue to inform defense spending. Management highlighted the F-35 supersonic stealth strike fighter's deterrence role in the Indo-Pacific, European, and Middle Eastern theaters. Against this backdrop, it appears highly likely that the Trump administration will maintain significant investment in U.S. military capabilities to stabilize the global strategic landscape and ward off a major conflict between Western and Eastern blocs.
Turning to Lockheed Martin's guidance for 2025, management forecast 9% free cash flow growth year over year, with sales growth of 4% to 5% in addition to the 5% posted in 2024. When coupled with Lockheed Martin's fair valuation at current trading levels, this outlook reinforces the notion that the stock remains an attractive option.
Long-term outlookLockheed Martin is favorably positioned over the longer term, boasting a record backlog of $176 billion at the close of 2024 and occupying a critical place in defense contracting for Western nations and their allies. However, defense contractors generally see the greatest gains during periods of cold or moderately hot conflict. While Lockheed Martin may benefit from escalating U.S.China power competition, current fiscal prudence within the U.S. government and the new administration's more multipolar and isolationist stance suggest that the risk of outright war is still comparatively low.
Consequently, it seems prudent to project moderate growth for Lockheed Martin over the medium to long termroughly five to ten years. Beyond that timeframe, geopolitical conditions could evolve: tensions between China and the West may cool due to improvements in the United States' federal debt position facilitated by the Department of Government Efficiency. Alternatively, the Trump administration or subsequent governments could struggle to navigate the current climate, potentially prompting the West to increase defense spending in response to China's continued military build-up.
ValuationLockheed Martin reported net earnings of $5.3 billion in 2024, down from $6.3 billion the previous year, largely due to $1.5 billion in losses relating to classified programs. In addition, management's 2025 earnings-per-share ('EPS') guidance of $27.00 to $27.30short of analysts' consensushas weighed on the company's share price, possibly creating an opening for discerning investors.
While management expressed confidence about handling pressure from the Department of Government Efficiency, Elon Musk criticized traditional defense programs like the F-35, advocating for more economical AI-driven alternatives. Lockheed Martin's Aeronautics division, which oversees the F-35 fighter jet, suffered a 40% decline in operating profit for Q4 2024. Musk's comments thus underscore a vulnerability in Lockheed Martin's portfolio, given the F-35's significant contributionapproximately 30%to the company's top line. Political and fiscal factors of this nature inform my expectation of restrained yet consistent growth over the next four years or more. Moreover, a potentially calmer macro environment, with fewer acute conflicts and diminished threats to the West owing to multipolar foreign policy, further underpins a tempered but steady trajectory.
On balance, I anticipate a 3% revenue growth rate for Lockheed Martin over the next five years. The company's net margin has been volatile in recent history and may come under increased pressure amidst the Trump administration's regulatory shifts. To remain cautious, whilst still acknowledging management's objective of leveraging the new regulatory framework for efficiency gains, I adopt a terminal net margin of 9%the figure at the end of Lockheed Martin's ten-year margin trend line. Under these assumptions, Lockheed Martin could achieve trailing twelve-month ('TTM') revenue of $82.36 billion by February 2030, with a corresponding net income of $7.41 billion.
The company's basic shares outstanding have steadily declined over the long term, dropping from 280 million in 2020 to 236.2 million at present. An estimate of 200 million shares outstanding by February 2030 seems realistic. This would produce a TTM EPS of roughly $37. Over the past five years, Lockheed Martin's price-to-earnings (P/E') ratio has risen from approximately 16 to 19.5. Although that trend points to an improving valuation multiple, future expansion may be curtailed by diminishing geopolitical threats and a heightened focus on cost control from the U.S. government. I consider a forward P/E of about 22 to be a reasonable assumption, implying a share price of roughly $815 by February 2030. Against the current stock price of $450, the implied five-year compound annual growth rate is 12.6%.
Applying the company's cost of equity6.1%, derived from a 4.42% 10-year Treasury rate, a market risk premium of 6%, and Lockheed Martin's beta of 0.28to discount that future share price of $815, I calculate a present intrinsic value of $608. This presents a 26% margin of safety relative to the current price of $450.
Further risksIt is important to note that my model leans somewhat optimistic. Slower revenue growth and continued margin compression could materialize if cost-cutting in the U.S. proves more challenging for Lockheed Martin's leadership than anticipated. A significant threat would be the suspension of the F-35 program, especially if AI-based defense firms begin to dominate over traditional manned aircraft and vehicles. In response to these competitive pressures, Lockheed Martin has introduced Astris AI, intended to supply scalable AI solutions across the American industrial base and other mission-critical sectors. Nevertheless, new entrants like Andurillaunched in 2017are swiftly advancing in autonomous systems powered by AI. Anduril has already partnered with OpenAI to integrate advanced AI models into its counter-uncrewed aircraft systems, signaling a formidable challenge to Lockheed Martin's future business prospects.
ConclusionLockheed Martin traditionally stands out as a stalwart in the defense sector. Yet, the outlook is not entirely secure given potential revisions to the U.S. budget. Over the coming years, defense procurement processes are likely to become more rigorous, placing a stronger emphasis on performance and costa trend reinforced by the Department of Government Efficiency. Accordingly, while I still foresee moderate alpha, the stock's riskreward profile over the next five years is not unequivocally compelling. In order for Lockheed Martin to flourish, it would likely require escalating geopolitical friction and a shift towards hotter conflict scenarios, which appear less probable under the Trump administration's focus on diplomacy, fiscal conservatism, and strategic deterrence, in contrast to the intensifying tensions experienced under President Biden.
This content was originally published on Gurufocus.com
