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Lockheed Martin: Is it time to get on board?

  • Glenn
  • Dec 27, 2020
  • 19 min read

Updated: 3 days ago


Lockheed Martin is one of the world’s leading aerospace and defense companies, with a portfolio that spans advanced fighter jets, missile systems, space technology, and military helicopters. Best known for its flagship F-35 program and strong relationships with the U.S. Department of Defense, the company combines engineering excellence with long-term government contracts and a massive backlog. As global tensions rise and allied nations modernize their defenses, Lockheed is positioned to benefit from sustained demand. The question is: Does this defense giant earn 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 start by mentioning that at the time of writing this analysis, I do not own any shares of Lockheed Martin. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I do not own any stocks in any of Lockheed Martin's direct competitors either. Thus, I have no personal stake in Lockheed Martin. 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 Corporation is a global aerospace, defense, and advanced technology company headquartered in Bethesda, Maryland. It was formed in 1995 through the merger of Lockheed Corporation and Martin Marietta. The company plays a central role in U.S. and allied national defense and generates approximately 75% of its revenue from the U.S. government. The remainder largely comes from international military customers. Lockheed Martin operates through four primary business segments: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space. The Aeronautics segment focuses on advanced military aircraft, including the F-35 Lightning II, which is the company’s largest program and accounts for over a quarter of total revenue. Other aircraft include the F-22 Raptor, F-16 Fighting Falcon, and C-130 Hercules. This segment also includes advanced development programs under the Skunk Works division, which works on cutting-edge technologies such as unmanned aerial systems (drones). The Missiles and Fire Control segment delivers a broad range of missile systems, tactical and strike weapons, air and missile defense solutions, and advanced targeting systems. Key programs include the Patriot PAC-3, THAAD, HIMARS, and the Javelin missile developed in partnership with RTX Corporation. Rotary and Mission Systems includes the Sikorsky helicopter line, such as the Black Hawk and CH-53K, as well as naval and land-based systems like the Aegis Combat System and C2BMC. This segment also offers cybersecurity, combat systems integration, and military training solutions. The Space segment develops and supports a variety of space systems, from missile warning and navigation satellites to strategic deterrence programs and spacecraft for human exploration. Notable programs include the Trident II D5 Fleet Ballistic Missile, Orion crew vehicle, GPS III, and hypersonic strike systems. Lockheed Martin benefits from several enduring moats that protect its position in the global defense industry. Its size and broad portfolio allow it to operate effectively across every major domain of defense—air, land, sea, space, and cyber—while smaller competitors are typically more limited in scope. The company is often chosen to lead complex, long-term programs like the F-35 or Trident missile system because of its proven ability to deliver on critical projects. Once awarded, these programs tend to run for decades, making it difficult for other companies to break in or replace Lockheed’s role. Its long track record and deep relationships with defense agencies, particularly in the U.S., also give Lockheed an edge. Governments value reliability and continuity in national security, and Lockheed has earned a reputation for both. In addition, the defense sector has significant barriers to entry. New players face a tough road: they must meet strict regulatory and security requirements, build trust over time, and develop advanced capabilities that take years to master. Technology is another key strength. Lockheed is a leader in stealth, missile systems, space technologies, and integrated combat solutions. It invests heavily in R&D to stay ahead, and its innovations are often deeply embedded into national defense strategies. Finally, the nature of its contracts adds a layer of financial stability. Many are long-term agreements with predictable revenue structures, including cost-plus or fixed-fee models. Most of Lockheed’s customers are governments with strong credit profiles, reducing risk and helping ensure consistent cash flow.

Management


James D. Taiclet serves as the Chairman, President, and Chief Executive Officer of Lockheed Martin Corporation, a role he assumed in 2020 after serving on the company’s board of directors for two years. He brings a unique combination of military, technical, and business leadership experience to the role. James 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 underpinned his work at the intersection of aerospace technology and global strategy. Before leading Lockheed Martin, James Taiclet was the CEO of American Tower Corporation for nearly two decades. Under his leadership, American Tower transformed from a company at risk of being delisted - then valued at $2 billion - into a global infrastructure leader with operations in 19 countries and a market capitalization exceeding $100 billion. During his tenure, he was named one of the world’s top-performing CEOs by Harvard Business Review on seven occasions. James Taiclet is also a member of the Council on Foreign Relations and serves as co-chair of the U.S.-India CEO Forum, a position appointed by the U.S. Department of Commerce - reflecting his ongoing involvement in international policy and strategic partnerships. As CEO of Lockheed Martin, James Taiclet has emphasized disciplined capital allocation and a focus on long-term value creation. In an earnings call, he explained his decision-making framework: “Risk-adjusted return on investment is the key criteria. And be honest about the risks up front and price them in. And if that price doesn't meet the competition, so be it. We'll move on to other things.” This statement reflects his commitment to strategic focus and prudent risk management - principles he carried over from his time at American Tower. His track record at American Tower shows that he knows how to lead a complex organization and create long-term value. Combined with his background in aerospace and international affairs, I believe he’s well equipped to lead Lockheed Martin in the years ahead.

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 has consistently delivered a high ROIC above 15% in all years and above 25% in nine out of ten years, which is impressive and excellent for a defense contractor. In 2024, ROIC dropped to its lowest level since 2017. This was mainly due to three temporary challenges. First, the company had to settle some contracts on less favorable terms than expected, which hurt profit margins. Second, ongoing supply chain disruptions reduced efficiency and added costs. And third, Lockheed reported a large loss of around $555 million on a classified program, which had a noticeable impact on results. These issues are not expected to have a lasting effect, and if conditions stabilize, Lockheed Martin has a good chance of returning to previous ROIC levels in the future.



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 has seen a mix of growth and decline in this area over the past decade. While there were strong increases in 2021 and 2022, both 2023 and 2024 saw notable decreases. These declines were mainly due to two factors. First, the company recorded large actuarial losses linked to its pension plans. This happened because lower interest rates (known as discount rates) increased the value of future pension obligations, and the company also made settlement payments that reduced equity. Second, returns from the pension plan’s investments were much lower than expected, which further weighed on equity. Despite these setbacks, management has said they expect equity to improve again in the coming years.



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. It’s no surprise that Lockheed Martin has consistently generated positive free cash flow every year over the past decade. However, in 2024, free cash flow declined, and so did the levered free cash flow margin. The main reason for the decline was a drop in operating cash flow—specifically, the company generated $948 million less in operating cash compared to the previous year. This was largely due to a $990 million pension contribution made in 2024, which reduced the amount of cash available. Lockheed Martin also acquired Terran Orbital, an investment that may benefit the company in the future but added short-term pressure on cash flow. Despite this dip, management remains cautiously optimistic about future free cash flow growth. They continue to view free cash flow as one of the most important measures of business performance and financial strength. Lockheed Martin is using its free cash flow to invest in future capabilities while also rewarding shareholders. In 2024, it invested $3,3 billion into research, technology, and production. At the same time, it returned $6,8 billion to shareholders through dividends and share repurchases. The buybacks alone totaled $3,7 billion in 2024, which helps support both earnings per share and free cash flow per share over time. The company has also increased its dividend for more than 20 consecutive years and has averaged about 5% annual dividend growth over the last decade. If free cash flow grows again as expected, investors could potentially benefit from even higher dividend payments in the future. While Lockheed Martin’s free cash flow yield is currently at its lowest level since 2018, this doesn’t automatically mean the shares are expensive. We’ll take a closer look at 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 3,71 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. One contributing factor is that Lockheed Martin spent more than its free cash flow in 2024 - returning significant cash to shareholders through dividends and buybacks, while also continuing to invest in its operations and acquiring Terran Orbital. Management has stated that they aim to maintain financial flexibility and keep borrowing costs low. For that reason, I expect they will focus on reducing debt once free cash flow improves.


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Risks


The reliance on the U.S. government is a risk for Lockheed Martin. In 2024, around 73% of the company’s total revenue came from government contracts, with 65% coming specifically from the Department of Defense. While this relationship provides steady demand, it also means Lockheed Martin’s business is heavily influenced by political decisions and shifting budget priorities in Washington. Changes in administration, evolving national priorities, or growing concerns over federal deficits can all affect how much is spent on defense. At present, there is increased uncertainty around future defense budgets. For example, President Trump has suggested that the U.S. could eventually cut military spending in half. Although he has also emphasized the importance of a strong military and continued investment in areas like missile defense and drones, his administration has proposed broader cost-cutting measures - including potential personnel reductions and program restructurings at the Pentagon. The Department of Defense has already been instructed to identify potential budget cuts, which could include workforce reductions and reevaluation of established programs. This raises a key risk for Lockheed Martin: if major programs are delayed, scaled back, or canceled due to political or fiscal pressures, the company’s revenue and profitability could be directly impacted. This risk is compounded by the way U.S. defense funding works. Most contracts are not fully funded upfront - they rely on annual appropriations from Congress. If lawmakers fail to pass a complete budget and instead rely on temporary funding extensions (known as continuing resolutions), new contracts can be delayed and funding for ongoing work may be disrupted, affecting Lockheed Martin’s operations and cash flow.


Competition is a meaningful risk for Lockheed Martin. The company operates in a highly competitive environment, where both traditional rivals and newer players are actively competing for government contracts. Major competitors include Boeing, RTX Corporation, Northrop Grumman, General Dynamics, and L3Harris. At the same time, Lockheed is facing increasing pressure from smaller firms, startups, and non-traditional defense contractors - some of which can move faster, operate with lower costs, or bring newer technologies to the table. A key challenge is that most U.S. government contracts are awarded through competitive bidding. Success depends on price, speed, innovation, and a strong track record of execution. In recent years, the Department of Defense has emphasized speed and cost-effectiveness, which can give an edge to smaller or more flexible companies. New procurement methods - such as “Other Transaction Authority” (OTA) agreements - are also making it easier for non-traditional vendors to compete for defense work, potentially at the expense of long-time contractors like Lockheed. Contract structures are also shifting. Fixed-price contracts and performance-based incentives are becoming more common, which means contractors are taking on more financial risk. In addition, the growing use of multi-award contracts means that multiple companies are selected for a single opportunity and must then compete for individual tasks. This can lower profit margins and increase the cost of competing, as Lockheed must spend more time and resources without any guarantee of winning specific work.


Laws and regulations are a significant risk for Lockheed Martin due to the highly regulated nature of the defense industry. Most of the company’s business comes from U.S. government contracts, which are governed by strict rules covering everything from cost accounting and cybersecurity to how contracts are awarded, managed, and possibly terminated. If Lockheed—or any of its suppliers or partners—fails to follow these rules, the consequences can be serious. This includes financial penalties, loss of contracts, or even being barred from bidding on future work. One example is that the U.S. government has the right to cancel contracts at any time. This can happen either because the government no longer needs the work (known as termination for convenience) or because it believes Lockheed didn’t meet its obligations (called termination for default). If a contract is canceled for convenience, Lockheed is typically reimbursed for the work completed - but it might not receive the full profit it expected, especially if funding is tight. If a contract is terminated for default, the impact is more severe: the company may be required to repay some of the government’s costs and could face damage to its reputation, making it harder to win future contracts. Another risk comes from undefinitized contract actions, or UCAs. These are situations where Lockheed starts working before the final terms - such as pricing and scope - are agreed upon. While this helps move projects forward faster, it also gives the government the power to later impose the final terms unilaterally. If Lockheed disagrees, it can appeal, but doing so takes time and adds legal and financial uncertainty. In the meantime, being locked into less favorable terms can reduce expected profits and make it harder to control costs. Finally, these regulatory risks aren't limited to the U.S. Lockheed also works with international governments through direct contracts or foreign military sales. These deals come with their own local laws, export rules, and political requirements, which can affect pricing, delivery schedules, and even whether a deal goes through at all.


Reasons to invest


Lockheed Martin’s large and growing backlog is a key reason to consider the company as a long-term investment. At the end of 2024, the company reported a record backlog of $176 billion - marking the third consecutive year of backlog growth. This backlog represents the total value of orders the company has already secured but has not yet delivered, effectively serving as a future revenue pipeline. To put that in perspective, the current backlog is equivalent to about 2,5 years of Lockheed’s annual revenue. That level of visibility is rare in most industries and provides investors with a high degree of confidence in the company’s near- and medium-term sales. It also reflects strong, sustained global demand for Lockheed’s products and services across all four of its major business areas: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space. What makes this particularly appealing is that each segment saw backlog growth in 2024, and each ended the year with a book-to-bill ratio above 1. This means that Lockheed is booking more orders than it’s delivering - an encouraging sign that demand is still outpacing supply. Lockheed has also emphasized efforts to convert backlog into revenue more efficiently by improving throughput and speeding up production. This suggests not only strong demand but also a growing ability to fulfill that demand and realize revenue sooner. In summary, the $176 billion backlog provides strong multi-year revenue visibility, supports consistent cash flow, and serves as a foundation for organic growth. In a sector where contract timing and political decisions can create uncertainty, Lockheed’s robust backlog helps smooth out those risks and adds to the company’s appeal as a steady, resilient investment.


The F-35 fighter jet program is one of the strongest reasons to invest in Lockheed Martin. As the largest and most advanced fighter aircraft program in the world, the F-35 plays a central role in Lockheed’s business, accounting for roughly one-third of the company’s total revenue. That scale makes it a critical driver of growth, and the outlook for the program remains very strong. In 2024, Lockheed delivered 110 F-35 aircraft, reaching the high end of its expected range. For 2025, deliveries are projected to rise to between 170 and 190 aircraft - reflecting strong production momentum. At year-end, the F-35 backlog stood at 408 aircraft, supported by large production orders as well as multi-year sustainment contracts that generate recurring revenue even after aircraft are delivered. Sustainment is a key part of the program, as the F-35 is built to serve for decades and requires ongoing maintenance, upgrades, and support. The program also continues to expand internationally. In 2024, Romania became the 20th country to join the F-35 enterprise, ordering 32 aircraft to complement its existing F-16 fleet. This growing global customer base helps build a common defense network among allies and ensures long-term demand for parts, software updates, and technical services. Beyond its financial impact, the F-35 is strategically important. Much of the U.S. fighter jet fleet is over 25 years old, and modernization is no longer optional. The F-35 is positioned as the backbone of future air power and is expected to lead the recapitalization of aging fleets both in the U.S. and abroad. In short, the F-35 gives Lockheed Martin not just a large and reliable stream of current revenue, but also long-term visibility through future orders, global reach through international customers, and strategic relevance as next-generation defense needs continue to evolve.


Lockheed Martin’s Missiles and Fire Control (MFC) segment is a key growth driver and a strong reason to invest in the company. The segment produces a wide range of combat-proven systems, including precision munitions, missile interceptors, and rocket launchers. Many of its flagship programs - such as the PAC-3 missile defense system, JASSM and LRASM strike missiles, GMLRS guided rockets, HIMARS launchers, and Javelin anti-tank missiles - are seeing strong and rising demand both in the U.S. and internationally. In 2025, MFC is expected to grow by about 8%, making it the fastest-growing segment within Lockheed Martin. This growth is being driven by production ramp-ups across several key programs. Importantly, it is not dependent on temporary funding supplements. Most of the planned production - such as 14.000 GMLRS rockets, 550–650 PAC-3 interceptors, 96 HIMARS units, and thousands of Javelins - is already under contract or backed by committed funding from U.S. and allied defense budgets. Another major tailwind is the global reassessment of military stockpile levels in response to rising geopolitical tensions. Many governments are working to rebuild and modernize their missile inventories, which Lockheed expects will support sustained demand for years to come. On the financial side, MFC is not only a consistent profit contributor - it is also Lockheed’s highest-margin segment, with typical operating margins around 14%. In short, the MFC segment combines mission-critical products, global demand, robust funding visibility, and a healthy margin profile. With many multi-year contracts in place and production continuing to scale, MFC is well-positioned to contribute meaningfully to Lockheed Martin’s revenue, earnings, and cash flow growth for years to come.


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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 22,31, which is from the year 2024. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 8,2% in the next five years. Additionally, I have selected a projected future P/E ratio of 16, 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 $190,49. 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 $95,25 (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 6.972, and capital expenditures were 1.685. 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 1.180 in our calculations. The tax provision was 884. We have 237 outstanding shares. Hence, the calculation will be as follows: (6.972– 1.180 + 884) / 237 x 10 = $281,69 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 $22,30 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $256,17.


Conclusion


I believe that Lockheed Martin is an intriguing company with excellent management. The company has a moat through its size, broad portfolio, and long track record. It has consistently achieved a high ROIC, and while ROIC decreased in 2024, it is expected to improve going forward. Free cash flow was also lower than usual in 2024, but should recover in the future. As it does, investors can expect more share repurchases and higher dividends. Lockheed Martin’s heavy reliance on the U.S. government - accounting for over 70% of its revenue—exposes the company to political and budget-related risks. Any shifts in defense spending priorities, contract delays, or funding disruptions tied to changing administrations or fiscal pressures could directly impact its revenue, profitability, and cash flow. Competition is also a risk because Lockheed operates in a crowded defense market where both traditional rivals and newer, more agile players are aggressively bidding for contracts. Evolving procurement policies - such as fixed-price and multi-award contracts - put additional pressure on margins and increase financial risk. Laws and regulations are another area of concern. Most of Lockheed’s business depends on strict government contracting rules, and non-compliance - even by a supplier - can lead to penalties, lost contracts, or reputational harm. The U.S. government can also cancel contracts or impose unfavorable terms, which adds further uncertainty. On the positive side, Lockheed Martin’s record $176 billion backlog represents a strong pipeline of future revenue, covering roughly 2,5 years of sales. This provides rare visibility in an otherwise cyclical industry and supports long-term planning. The F-35 program is a key reason to invest in Lockheed. It contributes about one-third of total revenue and is backed by strong global demand, a 408-aircraft backlog, and long-term sustainment contracts that generate recurring income. In addition, the Missiles and Fire Control (MFC) segment is a major growth engine, driven by sustained demand for systems like PAC-3, HIMARS, and Javelin. Supported by multi-year contracts and committed funding, MFC is also Lockheed’s highest-margin segment, combining profitability, production scale, and long-term strategic relevance. I believe that Lockheed Martin is a great company, and buying shares at the Ten Cap price of $281 could be a good long-term investment.


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