TipRanks Smart Value #17: Value Arsenal
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Dear Investors,
Dear Investors,
Welcome to the 17th edition of our recently launched TipRanks Smart Value Newsletter!
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This Week’s Top Value Pick: Lockheed Martin (LMT)
Lockheed Martin (LMT) is a leading U.S. aerospace and defense company, specializing in advanced technologies across the aerospace, defense, and security sectors. The company designs, develops, and manufactures cutting-edge systems, including aircraft, missiles, space systems, and cybersecurity solutions. Serving government and commercial customers worldwide, Lockheed Martin supports critical defense and space missions through innovation and operational precision.
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Strategic Growth
Lockheed Martin was created in 1995 through the merger of Lockheed Corp. and Martin Marietta, forming one of the world’s largest aerospace and defense companies. Since then, it has grown into a global leader in advanced technology systems, serving the U.S. government and allied nations across defense, space, and security missions.
Over the years, Lockheed has strengthened its position through targeted acquisitions. Early moves included Beontra AG – acquired in 2014 to enhance airport planning and forecasting capabilities – and Industrial Defender, a cybersecurity firm acquired earlier that decade. In 2015, it purchased Sikorsky Aircraft from United Technologies for around $9 billion. The addition of Sikorsky – known for the iconic Black Hawk helicopter – significantly expanded Lockheed’s presence in rotary-wing aviation and became a cornerstone of its Rotary and Mission Systems division.
In 2020, Lockheed Martin announced a deal to acquire Aerojet Rocketdyne, a major propulsion systems provider. The acquisition would have bolstered its vertical integration across missile and space systems. However, U.S. regulators blocked the $4.4 billion transaction in 2022 over antitrust concerns. Undeterred, Lockheed continued to pursue acquisitions aligned with its “21st Century Security” vision. In 2024, it agreed to acquire a majority stake in Terran Orbital, a satellite manufacturer, for $450 million, further advancing its capabilities in small satellites and space systems. Much of Lockheed’s earnings growth has been driven by flagship programs such as the F-35 fighter jet, PAC-3 and HIMARS missile systems, and a range of classified and strategic space projects. Alongside its strong program portfolio, the company has embraced digital transformation, open-architecture platforms, and emerging technologies like autonomy, cybersecurity, and AI. This shift has not only supported its innovation pipeline but also reinforced its ability to adapt to shifting defense priorities.
Today, Lockheed Martin has a market capitalization of around $107 billion, with annual revenues of nearly $72 billion on a trailing twelve-month basis. LMT is ranked #64 on the 2025 Fortune 500 list.
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Aerospace Innovation
Lockheed Martin is one of the world’s most advanced aerospace and defense companies, with a business model centered on long-cycle contracts primarily from the U.S. Department of Defense and allied nations. Its operations are divided into four core segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space.
The Aeronautics segment focuses on the design, production, and sustainment of both manned and unmanned aircraft. This segment includes some of the company’s most iconic platforms – stealth fighter jets like the F-35 Lightning II, F-16 Fighting Falcon, F-22 Raptor, and the C-130 Hercules, a tactical airlifter used globally..
In Q1 2025, Aeronautics revenue rose 3.1% to $7.06 billion, driven by higher F-35 production volumes, while operating profit grew 6%, aided by volume gains and a favorable $80 million adjustment on a classified program. International demand for the F-35 remains strong, with countries such as Singapore expanding their fleets, which helps offset any potential variability in U.S. orders. Lockheed expects to deliver between 170 and 190 F-35s in 2025, including aircraft delayed by the TR-3 software upgrade, and maintain a stable annual production rate of 150+ jets. The global fleet is projected to grow from roughly 1,100 to 3,500 aircraft over the program’s life, creating a steady stream of sustainment revenue. The Lot 19 contract, covering a key batch of F-35s, is on track to be finalized in the second half of 2025 and is already factored into the company’s guidance.
Following its loss in the U.S. Air Force’s Next Generation Air Dominance (NGAD) fighter jet contract to Boeing, Lockheed chose not to protest and is instead repurposing its NGAD technologies into existing platforms. This “5th Gen-plus” strategy aims to deliver up to 80% of the sixth-generation capabilities – such as enhanced stealth, sensors, and weapons – on the F-35 and F-22 at a lower cost, targeting budget-conscious defense partners.
Beyond fighter jets, Lockheed Martin’s MFC segment delivers air and missile defense systems, precision strike weapons, fire control, logistics, engineering support, ground vehicles, and energy management solutions. In Q1 2025, MFC revenue rose 13% YoY to $3.37 billion, driven by higher volumes in programs such as JASSM, LRASM, and HIMARS1. Operating profit surged 50% to $465 million – driven by $135 million in favorable booking rate adjustments and further aided by the absence of prior-year losses on Hellfire and classified programs.
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1 – Joint Air-to-Surface Standoff Missile; Long-Range Anti-Ship Missile; High Mobility Artillery Rocket System
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Next-Gen Defense
Rotary and Mission Systems (RMS) designs, builds, and supports military and commercial helicopters, missile defense systems, radars, lasers, combat systems, command and control (C2) solutions, cybersecurity, training simulators, and naval platforms. In Q1 2025, RMS posted 6% revenue growth to $4.33 billion, driven by higher volume in integrated warfare systems (notably Canadian Surface Combatant and radar programs) and Black Hawk helicopter production. Operating profit rose 21% to $521 million, lifted by a $45 million profit booking rate adjustment, a $50 million gain from a licensing arrangement, and favorable contract mix and cost recoveries.
The Space segment, which includes satellites, space transportation systems, and advanced strategic and defensive systems, reported a 2% sales decline to $3.21 billion, due to lower volumes in national security programs (particularly Next Gen OPIR and Transport Layer). However, operating profit increased 17% to $379 million, supported by $85 million in favorable booking rate adjustments related to civil space programs and growth in classified work, partially offset by lower equity earnings from United Launch Alliance. To stay ahead in a rapidly evolving global threat landscape, LMT is advancing its 21st Century Security Strategy – blending legacy defense platforms with next-gen technologies such as AI, 5G, and distributed cloud. At the center of this transformation is OneLMX, an enterprise-wide digital modernization program launched in 2022. It streamlines operations across engineering, manufacturing, and supply chains, resulting in faster development cycles, improved interoperability, and greater production agility across key programs like the F-35 and HIMARS.
Lockheed is also expected to become a major player in the emerging U.S. homeland missile defense program known as “Golden Dome.” The proposed layered system is expected to integrate ground-based interceptors (PAC-3, THAAD, NGI), space-based sensors, and advanced C2 networks that merge real-time data across domains. Lockheed’s involvement in PAC-3, THAAD, and NGI2 programs positions it strongly to support such multi-domain architectures.
Financially, LMT’s revenue base remains product-heavy—approximately 83% from sales of aircraft, missiles, and satellites, and the remaining 17% from services like maintenance and logistics. In Q1 2025, 72% of sales came from the U.S. government, 27% from international clients, and only 1% from domestic commercial customers. The company follows a cost-plus and milestone-based revenue recognition model that ensures steady backlog conversion, allowing tariff-related costs to be passed directly to the U.S. government.
To mitigate broader cost pressures from tariffs and supply chain disruptions, Lockheed uses diversified sourcing, contractual cost protections, and long-term planning. Roughly 40% of contracts are cost-type, allowing tariff costs to be passed through to the government. Fixed-price agreements frequently include cost adjustment clauses. The company is also increasing domestic and allied sourcing of critical inputs such as titanium and semiconductors to improve long-term supply chain resilience.
2 – PAC-3: Patriot Advanced Capability-3, an advanced air and missile defense interceptor; THAAD: Terminal High Altitude Area Defense; NGI: Next Generation Interceptor.
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Financial Strength
Lockheed Martin has delivered strong financial results in Q1 2025, reflecting the strength of its high-margin, contract-driven business model and long-term government agreements. Backed by solid execution, steady demand for its defense platforms, and continued innovation, the company has maintained resilient growth even in a complex global environment. Over the past five years, Lockheed’s revenues and earnings have grown at a CAGR of 3.3% and 1% respectively, fueled by strong demand for its core defense products, successful execution across business segments, operational resilience, continued government support, and ongoing innovation.
In the first quarter, the company reported total sales of $17.96 billion, up 4% year-over-year, and ahead of Street expectations. Growth was broad-based across all four business segments. Operating profit rose 16.6% to $2.37 billion, supported by higher volumes, favorable program mix, and $480 million in cumulative profit adjustments from strong contract performance, especially in the Space and Aeronautics segments.
Diluted EPS came in at $7.28, up by 13.9% year-over-year and above consensus estimates. Free cash flow stood at $955 million, reflecting solid earnings conversion and efficient working capital management, despite elevated contract asset growth tied to key programs like the F-35 and Black Hawk.
The company ended the quarter with $1.8 billion in cash and had a debt-to-equity ratio of 3.0x – well above the sector median – reflecting its strategy of using debt to drive shareholder returns amid a shrinking equity base. While this approach increases financial leverage, the company retains strong investment-grade credit ratings of “A” from Fitch and “A-” from S&P, both with stable outlooks, underscoring its solid financial position.
The company’s backlog remained robust at nearly $173 billion, offering multi-year revenue visibility. Approximately 64% of this backlog is expected to convert into revenue over the next 24 months, supporting consistent earnings and cash flow.
Looking ahead, for FY25, LMT expects sales of $74.3 and diluted EPS of $27.20, both at mid-point and in line with estimates. Segment operating margins are forecast at 11.0%, reflecting solid cost discipline and profitability across all divisions. Free cash flow is projected to rise 7–9%, with a midpoint of $6.7 billion, supporting dividend payments, share buybacks, and reinvestment. In Q2, the delivery of the F-35 jets and the finalized Lot 183 contract should release tied-up inventory cash, further strengthening liquidity. Capital expenditures are projected at $1.9 billion.
Over the long term, Lockheed sees sustained sales growth through 2027, supported by its robust backlog and rising U.S. and international defense budgets. Over the next three years, Lockheed Martin plans to deploy more than $10 billion toward R&D and capital investments, while returning at least $18 billion to shareholders through dividends and share repurchases.
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3 – Lockheed Martin’s Lot 18 contract is a major $11.8 billion agreement with the U.S. Department of Defense to produce 145 F-35 jets across variants A, B, and C for U.S. forces, international partners, and foreign military sales. As an Undefinitized Contract Action (UCA), it authorized production to begin with initial funding before finalizing the full terms.
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Undervalued Potential
Lockheed Martin continues to demonstrate a strong commitment to shareholder returns through a disciplined blend of dividends and share repurchases, an approach that reflects its stable cash flow, robust balance sheet, and long-term capital allocation strategy. The company has increased its dividend for 22 consecutive years, earning a reputation as a reliable income-generating stock. Over the past decade, Lockheed’s dividend has grown at a compound annual rate of 8.6%. As of Q1 2025, the company distributed 55.7% of its adjusted earnings to shareholders through dividends, underlining its focus on rewarding long-term investors.
In the first quarter of 2025, Lockheed paid out $796 million in dividends, or $3.30 per share, up from $3.15 a year earlier. Its current dividend yield stands at 2.88%, more than double the industrial sector average of 1.33%, making it an attractive option for income-focused investors. In addition to dividends, Lockheed continues to enhance shareholder value through share repurchases.
In Q1 FY25, the company bought back 1.7 million shares for $750 million. As of March 30, 2025, Lockheed Martin had $8.6 billion remaining under its share repurchase authorization. This follows a $3 billion increase approved by the board in 2024, bringing the total authorized buyback capacity to about $10 billion. These buybacks not only offset dilution from equity awards but also strengthen per-share metrics and signal confidence in the company’s long-term outlook.
Despite its solid fundamentals and the defensive nature of its business, LMT stock has declined by almost 1% in the past 12 months, reflecting market caution rather than any operational weakness. The stock trades at 15.8x trailing and 16.7x forward non-GAAP P/E ratios, both below its historical average. Moreover, on the TTM and forward P/E basis, the stock is now valued below all its industry peers – Northrop Grumman, RTX, General Dynamics, and GE Aerospace – despite its moat, stability, and robust dividends. This is partly explained by LMT’s lower revenue growth than most peers, while demonstrating higher defense concentration, which supports margin and backlog stability.
LMT’s price-to-cash flow ratio of 16x and EV/EBITDA multiple near 14.5x further suggest a conservative valuation and are at the lower end of the peer valuation scale. These muted multiples reflect macroeconomic uncertainty but also underappreciate Lockheed’s durable earnings power and its robust backlog.
Analyst sentiment remains positive. On average, Wall Street forecasts an upside of around 14%, with some analysts suggesting potential upside of up to 30%. Discounted cash flow analysis supports this optimism, indicating that the stock may be undervalued by as much as 35%.
Investing Takeaway
Lockheed Martin stands out as a compelling value investment, combining steady growth with strong shareholder returns. Despite its leading position in global defense, consistent operational performance, and a solid contract backlog, the stock trades at a discount to peers in the aerospace and defense sector. This undervaluation provides a potential margin of safety for long-term investors. Lockheed has a strong track record of dividend growth and continues to return capital through share repurchases, reinforcing its commitment to shareholder value. With rising global defense budgets, ongoing innovation, and expanding international demand for its flagship programs, Lockheed is well-positioned for long-term success.
