Big contract announcements at the U.S. Pentagon can clue investors in to the potential for lucrative stock wins from the companies that win those contracts. It doesn’t always work this way, but it does sometimes. That’s why I’m paying attention now to one of the biggest weapons contracts announced by the Department of Defense in recent weeks: A March 13 order from the Air Force instructing Lockheed Martin(NYSE: LMT) to proceed with production of order “Lot 23” of the Joint Air to Surface Standoff Missile (JASSM) and also order “Lot 9” of the Long-Range Anti-Ship Missile (LRASM), and to prepare for subsequent lots as well.
Both these missile types have been requested by Ukraine for use in its defensive war against Russia. Additionally, both weapons systems fit within the Pentagon’s plans to improve the United States’ long-range strike capabilities in the Pacific theater.
The Pentagon did not specify precisely how many missiles Lockheed will be building, and amounts appear to vary from lot to lot. However, a 2023 Defense Department document described the sizes of production lots as ranging from 550 to 810 missiles per JASSM lot, and from 120 to 240 missiles per LRASM lot. We also know much more precisely what the Pentagon plans to pay for these missiles: $1.9 billion.
The Pentagon’s contract announcement also clarifies that the production lots in question are part of a bigger rearmament project that has the Air Force ordering $5.2 billion worth of the missiles in total. And with three more production lots each anticipated for both the JASSM and the LRASM, it’s likely the size of this contract — and its value to Lockheed Martin — will continue to grow.
But precisely how much can contracts like these move the needle at a giant defense company like Lockheed, which did $71 billion in defense business last year, and recorded more than $5.3 billion in profits from it?
That’s actually harder to determine than you might think.
Most years, Lockheed Martin’s missiles and fire control division (MFC) is a pretty great business. From 2019 through 2023, according to data from S&P Global Market Intelligence, MFC rang up $7.8 billion in operating profit on $58.7 billion in revenue, earning an outstanding 13.3% operating profit margin on this part of its business. In the final quarter of 2024, however, something went seriously awry at MFC.
Without warning, the company took an $804 million charge to earnings for this division — and only this division. All on its own, this charge drove a 23% year-over-year decline in Lockheed’s annual profit for 2024, despite revenues rising 5% last year, and MFC revenues in particular rising 13%.
Lockheed blamed the decline on “$1.4 billion in losses on a classified program,” about which it would say no more.
Presumably, JASSM and LRASM are not part of this classified program … because, well, we know what these missiles are called. They’re not classified. And if these particular missiles are unconnected to what required Lockheed to take that charge last quarter, it makes sense to assume that higher production rates of them would still be good news for Lockheed, and that MFC will continue to produce its enviably high 13.3% operating profit margins for Lockheed Martin shareholders.
Image source: Lockheed Martin.
At $1.9 billion in revenue, the two lots of missiles in question should contribute more than $250 million to Lockheed Martin’s annual profit. I wouldn’t necessarily call this an incremental increase in profits, however. As just two lots in a long string of missile lots previously delivered, these latest orders will more likely simply replace past orders, and keep the revenue stream flowing.
That’s still good news, of course. It’s just probably not needle-moving news. For this reason, it leaves the way I value Lockheed Martin stock unchanged.
Lockheed stock trades at 1.5 times trailing sales, which is slightly more than its average valuation over the past 20 years by that metric, (and therefore not a bargain). Its price-to-earnings ratio is a bit less than 20 — again, this seems somewhat expensive in light of analysts’ forecasts for 13% long-term earnings growth and its 3% dividend yield. Finally, its free cash flow is roughly equal to its net income at present, giving it a price-to-FCF ratio of 20.
While I find none of these valuations alarmingly expensive, neither do any of them scream “cheap” to me. For the time being, I’ll be passing on Lockheed Martin stock.
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