Lockheed Martin: A Defense Industry Leader

Lockheed Martin is one of the largest defense companies in the world and plays a central role in supplying the United States and its allies with advanced military systems. From the F-35 fighter jet to missile defense systems and space technology, the company produces equipment that is critical to modern national security. With long-term government contracts, steady cash flow, and growing demand for missile and defense systems, Lockheed Martin is positioned to remain important for decades to come. The question is: Does this defense leader deserve a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Lockheed Martin at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Lockheed Martin, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Lockheed Martin is a global aerospace and defense technology company headquartered in Bethesda, Maryland. Formed in 1995 through the merger of Lockheed Corporation and Martin Marietta, it has become the largest defense contractor in the world and plays a central role in U.S. and allied national security. The majority of its revenue comes from the U.S. government, with most of the remaining revenue generated from allied international military customers. The company builds, integrates, and sustains advanced systems across air, land, sea, space, and cyber domains, serving defense, intelligence, and security agencies around the world. The company operates through four primary business segments. Its Aeronautics segment designs and manufactures advanced military aircraft, most notably the F-35 Lightning II, which is its largest program and accounts for more than a quarter of total revenue. The segment also includes aircraft such as the F-22 Raptor, F-16 Fighting Falcon, and C-130 Hercules. Within Aeronautics, the Skunk Works division focuses on advanced development programs, working on next-generation capabilities such as unmanned aerial systems, hypersonic technologies, and future air dominance platforms. The Missiles and Fire Control segment develops air and missile defense systems, tactical and precision strike weapons, and advanced targeting solutions. Major programs include Patriot PAC-3, THAAD, HIMARS, JASSM, LRASM, and the Javelin missile developed in partnership with RTX. The segment is also deeply involved in hypersonic weapons development and next-generation missile defense systems, areas that have gained strategic importance in recent years. Rotary and Mission Systems includes the Sikorsky helicopter line, such as the Black Hawk, Seahawk, and CH-53K. Beyond helicopters, the segment provides naval combat systems such as Aegis, integrated command and control solutions including C2BMC, radar and sensor systems, cybersecurity capabilities, and military training and simulation services. Increasingly, this segment focuses on integrating systems across domains to create networked, interoperable defense architectures. The Space segment designs and produces satellites, missile warning systems, strategic deterrence systems, and spacecraft for human exploration. Key programs include the Trident II D5 Fleet Ballistic Missile, the Orion crew vehicle developed for NASA, GPS III satellites, Next Gen OPIR missile warning systems, and hypersonic strike systems. Through this segment, Lockheed Martin is deeply embedded in national security space infrastructure and strategic deterrence capabilities. Lockheed Martin’s competitive moat is rooted in structural advantages, technological leadership, and institutional trust. Its scale and broad portfolio allow it to operate effectively across every major warfighting domain, which few competitors can match. This breadth enables the company to serve as a prime contractor on highly complex, multi-domain programs that require deep integration and coordination across technologies and suppliers. Once Lockheed Martin is awarded a major defense program, it is typically embedded for decades. Programs such as the F-35 or the Trident missile system involve long development cycles followed by extended production and sustainment phases. These contracts create extremely high switching costs because the systems become deeply integrated into national defense structures, supply chains, training systems, and operational doctrines. Replacing a contractor in such programs would be technically difficult, politically sensitive, and financially costly. The company also benefits from decades-long relationships with U.S. defense agencies and allied governments. In national security, reliability and continuity are critical. Governments prioritize partners with proven track records of delivering complex systems under demanding conditions. Trust and execution history therefore function as powerful barriers to entry. Technological leadership is another key pillar of its moat. Lockheed Martin has long been a leader in stealth aircraft, missile defense systems, hypersonics, advanced sensors, and space technologies. It invests heavily in research and development, and its advanced development organization continues to push innovation in emerging technologies such as artificial intelligence, autonomy, and open-architecture systems. Many of its technologies are embedded into national defense strategies, reinforcing long-term demand. The defense industry itself presents significant barriers to entry. Strict regulatory requirements, security clearances, export controls, and compliance standards make it difficult for new competitors to enter the market. The capital intensity and engineering complexity required to design and manufacture advanced defense systems further limit the competitive field. Finally, the nature of Lockheed Martin’s contracts provides financial resilience. Many agreements are long-term contracts with defined pricing structures, often cost-plus or fixed-fee arrangements. Since most customers are governments with strong credit profiles, revenue visibility and cash flow stability tend to be higher than in many commercial industries.

Management

James D. Taiclet serves as the Chairman, President, and CEO of Lockheed Martin, a role he assumed in 2020 after serving on the company’s board of directors for two years. He brings a combination of military experience, engineering education, and global business leadership to the role. James D. Taiclet began his career as a U.S. Air Force officer and pilot, where he also served as an instructor. He holds degrees in engineering and international relations, which have supported his work in aerospace, infrastructure, and international business. Before leading Lockheed Martin, James D. Taiclet was the CEO of American Tower Corporation for nearly two decades. When he took over, American Tower was a company under financial pressure with a market value of roughly two billion dollars. During his tenure, the company expanded internationally, strengthened its balance sheet, and grew into a global communications infrastructure leader operating in nineteen countries with a market capitalization exceeding one hundred billion dollars. He was recognized seven times by Harvard Business Review as one of the world’s top performing chief executives. His time at American Tower demonstrated his ability to scale a capital intensive business, allocate capital carefully, and deliver long term shareholder value. James D. Taiclet is also a member of the Council on Foreign Relations and has served as co chair of the U.S. India CEO Forum, a position appointed by the U.S. Department of Commerce. These roles reflect his involvement in international business and policy discussions, particularly those related to trade, technology, and economic cooperation. As CEO of Lockheed Martin, James D. Taiclet has emphasized disciplined capital allocation, operational performance, and long term value creation. In an earnings call, he explained his decision making framework by stating that risk adjusted return on investment is the key criterion and that risks must be assessed honestly and priced appropriately. If a contract does not meet the company’s financial standards, he has made clear that Lockheed Martin is prepared to walk away. This approach reinforces financial discipline in an industry where programs are often large and complex. James D. Taiclet has also focused on strengthening integration across the company’s business areas and increasing the use of digital tools, artificial intelligence, and open systems to improve performance and efficiency. Under his leadership, Lockheed Martin has worked to expand production capacity in response to rising global demand while maintaining cost control and balance sheet strength. His background as a pilot gives him practical insight into how defense systems are used in real operations, while his experience leading a large global infrastructure company shows that he understands how to manage long cycle investments and international operations. Combined with his focus on financial discipline and technology development, James D. Taiclet appears well equipped to lead Lockheed Martin in a period of increasing defense spending and evolving security needs.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Lockheed Martin’s ROIC has historically been very high because of how its business is structured. The company operates in an industry with very few competitors. Building advanced fighter jets, missile defense systems, and space programs requires decades of experience, trusted relationships with governments, and highly specialized engineering talent. Once Lockheed Martin wins a major contract, it often stays on that program for decades. That creates stable and predictable earnings. Another reason returns have been high is that the company does not usually build products without confirmed demand. Most of what it produces is tied directly to government contracts. Production is planned around confirmed orders, and payments are typically structured in stages as milestones are reached. This reduces financial risk and allows the company to earn solid profits without committing large amounts of capital upfront. The decline in 2025 to its lowest level since 2017 likely reflects several factors. Profit margins have been under pressure in certain areas, particularly in Aeronautics. The F 35 program is extremely large and complex. Cost pressures, production adjustments, and investments in upgrades and modernization can temporarily reduce profitability. Since the F 35 accounts for more than a quarter of total revenue, even modest margin changes can meaningfully affect overall returns. At the same time, the company has been investing to expand production capacity and develop next generation technologies such as hypersonic systems and advanced defense platforms. When spending increases ahead of higher earnings, returns can decline in the short term. Inflation and fixed price contracts may also have contributed. If input costs rise faster than contract pricing can be adjusted, profits can be compressed until new agreements reflect the higher cost environment. Looking ahead, the underlying structure of the business still supports strong returns. Demand from the United States and allied governments remains elevated, and many of Lockheed Martin’s major programs have long time horizons. If margins stabilize and recent investments translate into higher earnings, returns could improve over time. The exceptionally high levels seen around 2019 and 2020 may be difficult to repeat without meaningful margin expansion. However, the recent decline appears more related to near term pressures and increased investment rather than a deterioration of the company’s competitive position.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Lockheed Martin’s equity has been quite volatile over the past decade, with periods of very strong growth followed by several years of decline. The years with very strong growth, especially 2019 through 2021, were mainly driven by strong profits. During that period, the company benefited from solid performance in major programs such as the F 35, missile systems, and space contracts. When a company earns high profits and does not reduce its equity through large capital returns, equity can grow very quickly. The years with declining equity were not necessarily a sign of a weaker business. A major reason was large share repurchases. When Lockheed Martin buys back its own shares, it uses cash to reduce the number of shares outstanding. From an accounting perspective, that reduces equity, even if the company remains highly profitable. So equity can fall simply because management chooses to return capital, not because operations are deteriorating. Another factor that has affected equity over time is how pension obligations are recorded. Lockheed Martin has large pension plans for employees. The value of these obligations depends on long term assumptions such as interest rates and investment returns. When interest rates are low, the future pension obligations appear larger on paper, which can reduce reported equity. When interest rates rise, those obligations can shrink on paper, which can support equity. These are accounting effects rather than cash losses, but they can cause noticeable swings in reported equity from year to year. The increase in equity in 2025 after three years of decline likely reflects a combination of improved profitability and a less aggressive pace of share repurchases. Higher interest rates in recent years may also have reduced pressure from pension accounting, which would help stabilize or increase equity. Whether equity continues to grow depends mainly on profitability and capital allocation. If Lockheed Martin continues to generate solid earnings and does not aggressively reduce equity through large buybacks, equity should trend upward over time. However, if management prioritizes significant capital returns again, reported equity could fluctuate even if the underlying business remains strong.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Lockheed Martin’s free cash flow has been relatively high and stable over the past decade, and that reflects the underlying structure of the business. First, most of its revenue comes from long term government contracts. These programs are typically planned years in advance, with production schedules and payment milestones that provide visibility. That stability makes it easier to convert earnings into cash on a consistent basis compared to more cyclical industries. Second, a large portion of the company’s work involves sustainment, upgrades, logistics, and long running production programs rather than one time project revenue. Sustainment work in particular tends to generate steady cash because it is tied to fleets and systems that are already in operation and must be maintained regardless of short term economic conditions. Third, Lockheed Martin has become more focused on operational efficiency and cash discipline. Management recently highlighted that they have done a better job converting earnings into operating cash over the past two years. Strong cash generation in 2025 even allowed the company to pre fund a future pension obligation, meaning it used excess cash to meet a future requirement early. That improves flexibility in the following year. Free cash flow margins have also remained solid because the company operates in an industry with high barriers to entry and limited competition. Once a major program reaches stable production, it can generate attractive cash returns over many years. While margins can fluctuate depending on mix and program timing, the overall level has remained healthy. Looking ahead, free cash flow is guided to remain in the range of roughly 6,5 to 6,8 billion dollars, even as the company increases investment significantly. Management has stated that capital expenditures and internal research and development spending are rising sharply, approaching 5 billion dollars in 2026. That is a step change in internal investment, aimed at expanding production capacity, particularly in missiles and munitions, and accelerating next generation technologies. The fact that free cash flow remains strong even with this higher investment level suggests the underlying earning power of the business is solid. Over time, if these investments lead to higher production volumes, especially in Missiles and Fire Control where management expects double digit annual sales growth through the end of the decade, free cash flow could increase further. At the same time, elevated investment will likely cap short term free cash flow growth. The company is intentionally directing more cash back into the business to capture long term demand. So the trajectory may be steady rather than explosive. Lockheed Martin uses its free cash flow in several ways. A significant portion is reinvested into the business through capital expenditures and independent research and development to support innovation and production expansion. Management has described a disciplined capital allocation approach where investments must generate returns above the company’s cost of capital. The company also returns cash to shareholders through share repurchases and dividends. In addition, management has indicated that it remains open to strategic acquisitions if attractive opportunities arise, particularly those that would strengthen vertical integration or enhance technological capabilities. The current free cash flow yield indicates that the shares are trading at a relatively premium valuation compared to historical levels. We will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It’s important to assess whether a company has a manageable amount of debt that could reasonably be paid off within three years. To do this, we divide the company’s total long-term debt by its annual earnings. In the case of Lockheed Martin, the result is 4,13 years of earnings to cover its debt, which is above the three-year threshold. This suggests that the company’s debt level should be monitored. However, the context of the business is important. Lockheed Martin operates in a relatively stable industry where most revenue comes from long-term government contracts. This provides a high degree of visibility and predictability in earnings compared to more cyclical industries. Because of that stability, a slightly higher debt ratio is generally more manageable than it would be for a company with volatile demand. The company also generates strong and consistent free cash flow, which gives it flexibility. If management chose to prioritize debt reduction, it has the financial capacity to do so over time. Historically, Lockheed Martin has balanced debt reduction with returning capital to shareholders, which suggests that management is comfortable with the current debt level. That said, the ratio is still above the preferred threshold and should not be ignored. If earnings were to decline due to program delays, margin pressure, or changes in defense spending, the debt burden would become more significant.

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Risks

Reliance on the U.S. Government is a risk for Lockheed Martin. In 2025, approximately 72% of Lockheed Martin’s total sales were derived from the U.S. Government, with around 63% coming specifically from the Department of Defense. This level of concentration means that the company’s performance is heavily tied to political decisions, budget negotiations, and shifting defense priorities in Washington. Defense spending is not purely an economic decision. It is shaped by geopolitical events, domestic politics, fiscal constraints, and changes in administration. If Congress decides to reduce defense spending, shift funding toward other priorities, or slow the pace of certain programs, Lockheed Martin could face reduced orders, delayed funding, or lower production volumes. Even if long term demand remains intact, short term budget compromises can affect the timing of revenue and cash flow. Budget uncertainty is another important factor. When the U.S. Government operates under continuing resolutions instead of a fully approved budget, new program starts are often restricted. This can delay contract awards and slow transitions from development to production. Since major defense programs can run for decades, delays in early phases can have long lasting ripple effects on revenue timing. Government shutdowns and debt ceiling standoffs also create risk. Extended shutdowns can lead to payment delays and disruptions in program execution. While large defense contractors typically continue operating during short shutdowns, prolonged uncertainty can affect orders and funding visibility. Another structural risk is that U.S. defense contracts are typically funded on a yearly basis, even if the program itself spans many years. Contracts are often only partially funded at the beginning, with additional funding dependent on future Congressional appropriations. If funding is not approved in later years, the company may not recover certain costs incurred in anticipation of full funding. Although this situation is relatively rare for major programs, it remains a risk embedded in the system. There is also the risk of program termination or restructuring. Even flagship programs can face political scrutiny over cost overruns, strategic relevance, or changing military doctrine. If a major program such as a next generation aircraft or missile system were scaled back or cancelled, it could materially affect revenue and profitability, especially if Lockheed Martin had already invested heavily in production capacity. Finally, changes in funding priorities can affect growth areas. Lockheed Martin is investing in hypersonics, missile defense expansion, classified programs, and next generation systems. If future administrations prioritize different capabilities or allocate resources differently, expected growth in these areas could slow.

Competition is a risk for Lockheed Martin. Although Lockheed Martin operates in an industry with high barriers to entry, it still faces intense competition for major defense programs. Its primary rivals include Boeing, Northrop Grumman, RTX Corporation, General Dynamics, and L3Harris. These companies compete across aircraft, missile systems, space platforms, cyber solutions, and next generation defense technologies. In large, high profile competitions, losing a single major program can mean forfeiting billions of dollars in future revenue over decades. Many defense contracts are awarded through competitive bidding. Winning depends not only on technical capability, but also on price, execution track record, delivery speed, and perceived risk. In some cases, competitors may bid aggressively to secure long term strategic positioning, even if near term profitability is lower. If Lockheed Martin chooses to maintain pricing discipline while others accept thinner margins, it may lose certain awards. Procurement policies are also evolving. The Department of Defense has increasingly emphasized speed, cost efficiency, and access to commercial innovation. Mechanisms such as Other Transaction Authority agreements allow the government to work more easily with non traditional contractors and startups. These newer entrants may be more agile, especially in areas such as artificial intelligence, autonomy, space systems, and software driven warfare. While Lockheed Martin is investing heavily in these technologies, it must continuously adapt to avoid losing relevance in emerging areas. Technological disruption is another long term risk. Advances in unmanned systems, cyber warfare, robotics, artificial intelligence, additive manufacturing, and commercial space access are reshaping defense priorities. If new technologies reduce the need for traditional platforms, such as manned fighter jets, or if new entrants develop superior capabilities in critical areas like drone swarms or space launch, Lockheed Martin could lose its competitive edge in certain segments. The disruption caused by SpaceX in the launch market illustrates how quickly cost structures can change when a new player introduces a more efficient model. International competition adds another layer of complexity. Lockheed Martin competes not only with U.S. companies but also with foreign defense contractors in global tenders. These competitions are often influenced by political relationships, technology transfer requirements, and industrial cooperation agreements. Governments sometimes prioritize domestic industry development, which can disadvantage foreign suppliers. There is also strategic risk in future franchise programs. Winning a next generation aircraft, missile defense system, or space platform can secure revenue for decades. Losing such a program to a rival could weaken Lockheed Martin’s long term growth profile and reduce economies of scale in related areas.

Laws and regulations are a meaningful risk for Lockheed Martin because nearly every aspect of its business is governed by complex and evolving government rules. Lockheed Martin contracts primarily with U.S. government agencies, especially the Department of Defense and NASA, and also with foreign governments through similar regulatory frameworks. These contracts are subject to detailed procurement laws that govern how contracts are awarded, how costs are calculated, what can be charged to the government, how performance is measured, and how information is handled. Compliance is not optional. A failure to follow these rules can lead to fines, contract termination, suspension from bidding on new contracts, loss of export privileges, or even civil or criminal proceedings. One key risk is that the government can change procurement rules and policies at any time. Executive Orders, acquisition reforms, and updates to the Federal Acquisition Regulation and Defense Federal Acquisition Regulation Supplement can alter how contracts are structured and how profits are earned. For example, an increased shift toward fixed price development contracts places more financial risk on the contractor. If costs rise or technical challenges emerge, Lockheed Martin may not be able to recover those additional costs, which can reduce profitability. Another risk stems from the government’s right to terminate contracts. U.S. government contracts can be terminated either for convenience or for default. Even if performance is strong, the government can terminate a contract for convenience due to budget changes or shifting priorities. While contractors are generally reimbursed for work performed, future expected profits disappear. A termination for default is more serious and can expose the company to financial penalties and reputational damage. Undefinitized contract actions create additional uncertainty. In these cases, Lockheed Martin begins work before the final terms and pricing are fully agreed upon. Although agreements are typically finalized later, the government has the authority to unilaterally set the final terms. If those terms are less favorable than expected, the company’s anticipated profit and cash flow from the program can decline. The company must also comply with strict cost accounting standards that differ from traditional accounting rules. It must carefully document and certify cost and pricing data. If regulators determine that costs were improperly allocated or disclosed, even unintentionally, the company could face penalties or required repayments. Export controls and trade restrictions further complicate operations. The sale of defense products internationally is tightly regulated. Changes in export laws, sanctions, or geopolitical relationships can limit the company’s ability to complete or pursue foreign contracts. Many international deals also require compliance with local industrial cooperation rules, adding complexity and potential legal exposure. Finally, there is growing political scrutiny of defense contractors. Recent policy initiatives have considered limiting share repurchases, dividends, or executive compensation under certain conditions. While the full impact of such measures remains uncertain, they demonstrate that government customers also serve as regulators, with the power to influence corporate financial decisions.

Reasons to invest

The F-35 fighter jet program is a reason to invest in Lockheed Martin. The F-35 is the largest and most advanced fighter aircraft program in the world and serves as the backbone of Lockheed Martin’s business. It accounts for roughly one third of total revenue and represents the company’s single most important franchise. In 2025 alone, Lockheed Martin delivered 191 aircraft, exceeding expectations and marking a record year for deliveries. The production rate remains at approximately 156 aircraft per year, demonstrating the scale and maturity of the program. One of the strongest investment arguments is long term visibility. The United States plans to procure 2,456 F-35 aircraft across the Air Force, Navy, and Marine Corps. In addition, multiple international partner nations and foreign military sales customers continue to place orders. Belgium and Finland, for example, recently integrated their first F-35 aircraft into service. Each new customer strengthens the global ecosystem and extends the program’s duration. Beyond production, sustainment is a major value driver. The F-35 is designed to serve for decades, which means maintenance, spare parts, software upgrades, and modernization will continue long after production peaks. Sustainment revenue is typically recurring and can grow as the global fleet expands. Management has highlighted that F-35 sustainment is expected to deliver double digit growth and has committed over one billion dollars of additional internal investment to improve spare parts availability and mission readiness. Improving mission capable rates not only supports operational performance but also strengthens Lockheed Martin’s long term relationship with customers. The program also benefits from significant recent contract awards. In 2025, Lockheed Martin finalized Lot 18 and 19 production contracts, secured the fiscal year 2026 Air Vehicle Sustainment contract, and received modifications supporting Lots 20 and 21. These awards totaled more than 15 billion dollars and reinforce demand from both domestic and international customers. The company ended the year with record backlog, with the F-35 as the largest contributor. Strategically, the F-35 is central to modernization efforts. Much of the U.S. and allied fighter fleet is more than 25 years old. The F-35 is positioned as the primary replacement platform and a key element of future air dominance. Its ability to operate across air, land, sea, and cyber environments makes it more than just a fighter jet. It functions as a networked data and sensor platform, connecting forces across domains. This integration strengthens its long term relevance. The scale of the program is also difficult to replicate. Lockheed Martin’s mile long facility in Fort Worth employs more than 19.000 people, with over 1.900 suppliers across the United States supporting production. The production rate is significantly faster than other allied fighter programs currently in operation. This industrial base creates barriers to entry and reinforces Lockheed Martin’s leadership position.

The Missiles and Fire Control segment is a reason to invest in Lockheed Martin. Missiles and Fire Control, often referred to as MFC, has become one of the company’s strongest growth engines. The segment produces combat-proven systems such as PAC-3 missile interceptors, THAAD interceptors, HIMARS launchers, GMLRS guided rockets, JASSM and LRASM strike missiles, and Javelin anti-tank missiles. These systems are not experimental platforms. They are actively deployed, heavily used, and increasingly in demand by the United States and allied nations. One of the most compelling aspects of MFC is the visibility of demand. Production ramps are not dependent on temporary supplemental budgets. Many of the planned volumes are already backed b long-term commitments. For example, annual PAC-3 MSE production is expected to increase from roughly 600 units per year to 2,000 per year under a new 7-year framework agreement. That more than triples output. Similar framework agreements have been announced for THAAD interceptors. These longer-term arrangements provide clearer planning visibility and support large-scale investments in production capacity. In 2025, the segment delivered record numbers, including the 750th HIMARS launcher and hundreds of PAC-3 interceptors. Lockheed Martin also secured a contract for 31 THAAD interceptors and the largest production contract to date for the IRST21 Block II pod system. These milestones highlight both scale and sustained demand. Geopolitical developments have created a structural shift in how governments view munitions. Many countries are reassessing stockpile levels and recognizing that inventories need to be larger and replenished more quickly. Missile defense and precision strike capabilities are now viewed as essential. This environment supports long-term demand rather than short-term spikes. Financially, MFC is one of Lockheed Martin’s most attractive segments. In 2025, full-year operating profit increased significantly year over year, and the segment achieved an operating margin of 13,8%. Although there may be modest margin pressure in the early years of production ramps due to startup costs, management has indicated that margins are expected to improve over time as scale increases and risks are reduced. The company is willing to accept slight near-term margin dilution because revenue growth is expected to be double digit and potentially even mid-teens annually through the end of the decade. Another important factor is capital investment. Lockheed Martin plans multibillion-dollar investments to expand missile production, including new facilities and acceleration centers across multiple states. This expansion is designed to meet committed demand and is supported by framework agreements that include protections if procurement strategies change. These make-whole provisions reduce downside risk and provide additional confidence in long-term returns.

Innovation is a reason to invest in Lockheed Martin. Defense is no longer just about building platforms. It is about software, autonomy, space systems, artificial intelligence, networking, and the ability to integrate all of these into operational capability at scale. Lockheed Martin is investing heavily to ensure it remains relevant as warfare evolves. One example is the integration of unmanned systems with existing aircraft. At Skunk Works, in partnership with the U.S. Air Force, Lockheed Martin demonstrated the ability for an F-22 to control a drone wingman in flight. That is a significant step toward future collaborative combat aircraft, where manned fighters operate alongside autonomous drones. If this concept becomes central to next generation air combat, Lockheed Martin is already positioned as both the aircraft manufacturer and the integrator of the unmanned systems. The company is also investing its own research and development funds into autonomous systems. The autonomous Black Hawk helicopter is a real flying platform that can be operated without a pilot, controlled through onboard systems or remotely. That capability opens up new use cases in logistics, contested environments, and high-risk missions. By funding prototypes internally, Lockheed Martin increases its ability to shape future programs rather than simply respond to government requests. Another area is low-cost precision strike. The internally funded cruise missile concept known as CMMT is designed to provide high capability at a lower unit cost. As governments look to build larger stockpiles while managing budgets, affordability becomes increasingly important. Offering scalable, cost-effective systems can expand market opportunities. In naval and maritime domains, Lockheed Martin has partnered with Saildrone to integrate missiles onto autonomous surface vessels. By adapting an existing missile such as JAGM for surface-to-surface use and designing new launch configurations, the company is combining proven weapons with new platforms. This kind of practical innovation increases deterrence capability while leveraging existing supply chains and logistics networks. In space, Lockheed Martin is pursuing ambitious projects such as space-based interceptors and advanced missile tracking satellites. The company already builds hardened low orbit satellites and is working on intercept technologies that could operate from space. As missile threats grow more advanced, space-based tracking and interception systems may become central to national defense architectures. Digital modernization is another theme. Lockheed Martin pioneered over-the-air updates for systems such as Aegis, enabling real-time software upgrades and battlefield adaptability. It has also launched advanced satellites like GPS III and contributed to next generation transport and tracking layers in space. These capabilities strengthen its role not only as a hardware manufacturer but also as a systems integrator in networked warfare. Importantly, innovation at Lockheed Martin is tied to scale. Many startups can develop promising technologies, but few have the manufacturing capacity, supply chain infrastructure, global deployment capabilities, and cybersecurity systems required to deliver mission-critical systems in large quantities. Lockheed Martin combines advanced research with industrial scale production. That combination creates both technological relevance and economic durability.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 21,49, which is from the year 2025. I have selected a projected future EPS growth rate of 13%. Finbox expects EPS to grow by 12,9% in the next five years. Additionally, I have selected a projected future P/E ratio of 26, which is double the growth rate. This decision is based on Lockheed Martin's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $468,83. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Lockheed Martin at a price of $234,42 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 8.557, and capital expenditures were 1.649. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 1.154 in our calculations. The tax provision was 905. We have 231,4 outstanding shares. Hence, the calculation will be as follows: (8.557– 1.154 + 905) / 231,4 x 10 = $359,03 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Lockheed Martin's free cash flow per share at $29,85 and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is $430,31.

Conclusion

I believe that Lockheed Martin is an intriguing company with excellent management. The company has built its moat through structural advantages, technological leadership, and institutional trust. The company has consistently achieved a high ROIC, and this is a trend that is expected to continue in the future. Free cash flow has also been stable historically, and Lockheed Martin is expected to continue generating consistent free cash flow, which will partly be used to pay dividends and make buybacks. Reliance on the U.S. Government is a risk for Lockheed Martin because around 72% of its revenue depends on political decisions, defense budgets, and Congressional appropriations. Changes in spending priorities, budget delays, program cancellations, or government shutdowns can directly affect the timing, scale, and profitability of its major programs. Competition is a risk because major defense contracts are awarded through competitive bidding, and losing even one large program can mean forfeiting decades of high-value revenue, while evolving procurement policies and technological disruption can put pressure on margins and long-term positioning. Laws and regulations are also a risk because the business is governed by complex and evolving government rules that affect how contracts are awarded, priced, and performed, and changes in these rules can directly impact profitability, cash flow, and growth opportunities. The F-35 fighter jet program is a reason to invest because it represents roughly one third of total revenue and provides decades of production and recurring sustainment visibility, supported by large U.S. procurement plans and growing international demand. The Missiles and Fire Control segment is also a reason to invest because it is one of the company’s fastest-growing and highest-margin businesses, supported by long-term demand for missile defense and precision strike systems and multiyear agreements that provide revenue visibility. Innovation further supports the investment case as Lockheed Martin continues to develop next-generation capabilities in autonomy, artificial intelligence, and space systems that are likely to shape future defense programs. I believe there are many things to like about Lockheed Martin, and buying shares at the Payback Time price of $430 would make a good long-term investment.

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