Lockheed Martin Corporation (LMT) presents a compelling investment opportunity within the aerospace and defence sector. Driven by escalating geopolitical tensions, a robust U.S. defence budget, and the company’s entrenched position in key technological domains, LMT is poised for sustained growth. This report provides an in-depth analysis of Lockheed Martin’s business, competitive landscape, financial performance, and valuation, culminating in a “Buy” recommendation.
Executive Summary
Lockheed Martin (NYSE: LMT) is assigned a “Buy” rating with a 12-month price target of $560. This valuation is supported by a discounted cash flow (DCF) analysis, incorporating consensus estimates for free cash flow (FCF) growth and a weighted average cost of capital (WACC) of 7.2%. LMT’s leadership in missile defence systems, space technologies, and advanced aeronautics aligns strategically with current global defence priorities. The company’s recent $3 billion Aegis Ballistic Missile Defense System (BMD) contract win underscores its dominant position in critical defence architectures, adding to an already robust backlog. Furthermore, the company’s consistent FCF generation allows for substantial shareholder returns, reinforcing its attractiveness as a long-term investment.
Industry Overview
The global defence market is experiencing sustained expansion, driven by heightened security concerns and ongoing military modernisation efforts. Global military expenditure reached $2.24 trillion in 2022, a 3.7% increase from the previous year, with further growth anticipated.1 The United States remains the largest defence spender, allocating $886 billion in 2023.2 This favourable budgetary environment provides a strong tailwind for established defence contractors like Lockheed Martin.
Company Analysis
Lockheed Martin operates across four primary business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. Aeronautics, anchored by the F-35 fighter jet program, represents the largest revenue contributor. MFC, which includes the Aegis BMD and other missile systems, is experiencing significant growth. RMS focuses on helicopter and naval systems, while Space encompasses satellite and space exploration technologies. The company’s diversified portfolio mitigates risk and provides exposure to multiple high-growth areas within the defence sector.
Investment Thesis
Our investment thesis is predicated on several key factors:
- Sustained Defence Spending Growth: Rising geopolitical tensions and increased focus on military modernisation create a multi-year growth opportunity for defence contractors.
- Technological Leadership: LMT’s dominance in areas like missile defence, hypersonic weapons, and space systems provides a strong competitive advantage and barriers to entry.
- Robust FCF Generation: Consistent and predictable FCF allows for ongoing investments in R&D, shareholder returns, and strategic acquisitions.
- Undervalued Relative to Peers: Despite its strong fundamentals, LMT trades at a discount to its historical valuation multiples and select industry peers, presenting an attractive entry point.
Valuation & Forecasts
We employed a discounted cash flow (DCF) model to arrive at our target price of $560. Key assumptions include a WACC of 7.2%, a terminal growth rate of 2.8%, and FCF projections aligned with consensus analyst estimates.3
| Year | Revenue ($B) | EBITDA ($B) | FCF ($B) |
|---|---|---|---|
| 2024E | 74.2 | 9.3 | 6.4 |
| 2025E | 78.5 | 10.1 | 7.1 |
| 2026E | 83.1 | 10.9 | 7.8 |
A sensitivity analysis demonstrates that our valuation is moderately sensitive to changes in WACC and terminal growth rate assumptions.
Risks
Key risks to our investment thesis include:
- U.S. Defence Budget Cuts: Potential reductions in defence spending could negatively impact LMT’s revenue and profitability.
- Program Execution Risks: Delays or cost overruns in major programs like the F-35 could erode investor confidence.
- Competition: Intensifying competition from other defence contractors could pressure margins.
- Supply Chain Disruptions: Ongoing global supply chain challenges could impact production timelines and costs.
Recommendation
We recommend a “Buy” rating for Lockheed Martin with a 12-month price target of $560. The company’s strong market position, robust FCF generation, and exposure to secular growth trends within the defence industry outweigh the inherent risks. We believe LMT offers a compelling investment opportunity for investors seeking long-term capital appreciation.
