Lockheed Martin: A Compelling Addition to Your Portfolio

Hello,

today we look at a potential company that might benefit in the Trump administration. Lockheed Martin Corp. is a global security and aerospace company, which engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services. It operates through the following business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space.


TECHNICAL ANALYSIS- Checklist

1. Structure drawing (Trend line drawing on past price chart data)- As shown below
   
2. Patterns identification (Naming patterns on past price chart data for future wave)- as shown
   
3. Future indication (Reading indicator for future wave)- 0 crossover on the MACD
   
4. Future wave (Drawing on future price chart using future indication from indicator)- As shown
   
5. Future reversal point (Identifying trend reversal point on price chart using structure)- Target point $660
   

Global defense spending has surged as nations strengthen their military capabilities, driving demand for advanced weaponry such as fighter jets, which are critical for air combat. These is largely because we are currently facing a resurgence of wars in the globe. In January 2025, over 10 countries hosted extreme levels of conflict, including: Russia, Ukraine, Israel, Gaza, Lebanon, Myanmar, Syria, Palestine, Mexico, Nigeria, Brazil, Taiwan, Colombia, Haiti, Yemen, and Sudan. This trend significantly benefits Lockheed Martin, a leading combat aircraft manufacturer, through steady orders from the Pentagon and U.S. allies.

Long-term, the Pentagon has prioritized modernizing military capabilities to counter aggression from major powers like China and Russia, while managing threats from terrorism and hot spots like Iran and North Korea. Lockheed Martin is well-positioned to capitalize on these priorities with its exposure to key programs such as the F-35 fighter jet, hypersonic missiles, and the militarization of space. In December 2024 Lockheed Martin secured a nearly $12-billion contract to produce 145 additional F-35 Lightning II stealth fighter jets for the US military and its international allies.

The F-35 program, the largest weapons program in history, provides Lockheed Martin with stable revenue streams through procurement and maintenance contracts. As of September 30, 2024, Lockheed had delivered 1,040 F-35 aircraft since the program's inception. Its advanced sensors, mission readiness, and ability to connect air, land, sea, space, and cyber domains have driven strong demand globally. We expect Lockheed to remain a reliable partner in supporting the United States Government’s defense goals.

While the shift towards unmanned systems is being explored, experts like AeroDynamic Advisory Managing Director Richard highlight the continued relevance of manned fighter jets. Richard notes that drones cannot yet match the versatility of jets in intercepting enemy bombers, supporting naval operations, or achieving other strategic objectives. This bodes well for Lockheed Martin's continued success in the sector.

While all these looks quite positive for the industry, the primary risk for defense spending is budgetary pressure. Under cost-cutting measures, Musk through the new cost cutting department DOGE has pointed to defense procurement, which represents less than 4% of the $6.8 trillion 2024 federal budget. Musk’s co-lead, Vivek Ramaswamy, has also advocated for shifting funds toward unmanned platforms instead of traditional fighter jets. While the defense budget might face stress, we anticipate reductions to come from non-military items used by the Department of Defense rather than core defense capabilities. We do not see a significant cut in the arms procurement or a shift to unmanned platforms. Another risk Lockheed Martin faces is associated with its reliance on U.S. military funding, which is inherently political and uncertain. Moreover, competition from SpaceX could challenge Lockheed’s dominance in space-related contracts. In 2023, Lockheed Martin’s space division generated $12.61 billion in revenue, a substantial contribution to its total $67.57 billion revenue for the year. To strengthen its position, Lockheed Martin completed its acquisition of Terran Orbital and its subsidiary Tyvak International, leading manufacturers of modular spacecraft. Lockheed has collaborated with Terran Orbital on several projects, including Space Development Agency programs and technology demonstrations. Should this risk materialize, then we would see a significant income wiped out.

The 2024 Republican Party platform emphasize the development of a U.S.-made "Iron Dome" and the modernization of the military. An Iron Dome, as defined by Wikipedia, is a mobile all-weather air defense system that intercepts and destroys short-range rockets and artillery shells fired from 4 to 70 kilometers away. For this task we expect collaboration between Rafael Advanced Defense Systems and Lockheed Martin on designing and manufacturing the Iron Dome for U.S. use. These two companies have worked together successfully in the past. Notably, in December 2022, Lockheed Martin and Rafael Advanced Defense Systems signed a teaming agreement to jointly develop, test, and manufacture High Energy Laser Weapon Systems (HELWS) in both the U.S. and Israel.



The below are the customers of Lockheed Martin as per their website

Australia, Brunei, Chile, Colombia, Mexico, Morocco, Philippines, Poland, Romania, Saudi Arabia, Slovakia, South Korea, Taiwan, Thailand, Turkey, Unites states, Israel & others


Financial Summary

Lockheed Martin reported strong financial performance for the quarter ended September 29, 2024:

• Net sales: $17,104 million, up from $16,878 million in the same quarter of 2023.
  
• Gross profit: $2,117 million, compared to $2,048 million in Q3 2023.
  
• Operating profit: $2,140 million, an increase from $2,042 million in the same period last year.
  
• Net earnings: $1,623 million, slightly down from $1,684 million in Q3 2023.
  
• Diluted earnings per common share: $6.80, compared to $6.73 in the same quarter of 2023.
  

For the nine months ended September 29, 2024, the company reported:

• Net sales: $52,421 million, up from $48,697 million in the same period of 2023.
  
• Gross profit: $6,240 million, compared to $6,184 million in the same period last year.
  
• Operating profit: $6,317 million, an increase from $6,214 million in the same period of 2023.
  
• Net earnings: $4,809 million, down from $5,054 million in the same period last year.
  
• Diluted earnings per common share: $20.05, compared to $19.97 in the same period of 2023.
  

Lockheed Martin's business performance for the quarter ended September 29, 2024, was marked by strong contributions from its four business segments:

• Aeronautics: Generated $6,487 million in revenue, with the F-35 Lightning II program representing approximately 22% of total consolidated net sales.
  
• Missiles and Fire Control (MFC): Reported an increase in net sales to $3,175 million, up from $2,939 million in Q3 2023.
  
• Rotary and Mission Systems (RMS): Achieved net sales of $4,367 million, compared to $4,121 million in the same period last year.
  
• Space: Recorded net sales of $3,075 million, slightly down from $3,101 million in Q3 2023.
  

Lockheed Martin Corporation Forecasts Fiscal Year 2024 EPS of Approximately $26.65. Lockheed has no major debt maturities over the next three years and has more than sufficient debt capacity to finance incremental acquisitions and/or weather a potential funding trough.

Challenges and Risks

• U.S. Budget Environment: With approximately three-quarters of sales from the U.S. Government, changes in defense spending and funding levels can significantly affect the company's financial performance.
  
• Geopolitical and Economic Environment: Global security concerns, supply chain challenges, inflation, and macroeconomic conditions present risks to the company's operations and profitability.
  
• Operational Risks: The company faces challenges in ramping up production, managing supplier costs, and maintaining operational efficiency.
  
• Foreign Currency Exchange Rates: The company is exposed to risks associated with changing foreign currency exchange rates, although its market risk exposures have not changed materially since December 31, 2023.
  

Our recommendation

Lockheed Martin continues to experience increased demand for advanced weaponry like the F-35 fighter jet due to increased global conflict. The company’s strong order book positions it well for long-term growth. While risks exist, including budgetary pressures and competition from SpaceX on space militarization, Lockheed Martin’s strategic collaborations and revenue diversification strategies strengthen its outlook.

From a technical standpoint, Lockheed Martin's stock appears to offer an attractive entry point. Since October 2024, the stock has corrected by over 25%, presenting a potential upside opportunity. The MACD indicator suggests a bullish crossover, supported by strong fundamentals.
The company recently secured an $11.76 billion contract with the United States government to produce and deliver 145 F-35 jets across all three variants of the program. This contract, set for completion by June 2027, provides stability against short-term market volatility. Furthermore, the ongoing geopolitical climate suggests that more nations are likely to increase their defense budgets, bolstering future sales.
Should Lockheed Martin collaborate with Israel’s Rafael Advanced Defense Systems, there is significant potential to develop a superior version of the Iron Dome, further enhancing sales prospects. Profitability is projected to expand by 10–20 basis points annually, with the segment EBIT margin expected to reach 11% by the end of the decade. we recommend a Buy with a target price of $ 660.

Sources: Lockheed Martin website
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