Investors, Locked in on Lockheed’s Guidance, May Miss Their Shot

Sometimes earnings season is like hunting for a target from extremely close range — but failing to see all the other flashes further out on the radar. Investors, in other words, become so myopic, they miss the big picture, simply setting their sights on the latest quarterly report. Take as an example the recent earnings-related pullback in Lockheed Martin (LMT) .

Were investors so fixated on guidance and other misses that that couldn’t spot a good buying entry point?

Lockheed’s quarter was indeed messy, with a series of non-recurring charges, supply chain disruptions, and deferred revenue all causing a miss Wall Street’s expectations. A lack of a finalized agreement for F-35s weighed on the quarter, but a deal expected with the Department of Defense in the third quarter will set up Lockheed’s Aeronautics division for solid revenues, as the decade progresses. LMT plans to deliver its goal of 156 F-35 jets in 2025 and beyond, up from 147 to 153 F-35s in 2023 and 2024.

LMT had rallied over 25% earlier this year, running well ahead of fundamentals, in anticipation of ramped up defense spending from Russia’s invasion of Ukraine. As spending has materialized much slower than hoped for, the stock has dropped around 18% from the April highs, giving up most war-related gains. Investors’ expectations that Lockheed’s positioning would translate into material short-term business growth were mistaken outside of Javelin and missile production.

Still, Susquehanna, with a high target of $539, notes that Lockheed has seen an influx of domestic and international orders already received and on the horizon due to the increased emphasis on defense spending.

“With the main uncertainty of near-term F-35 production removed, we see growth upside possibly greater than the company’s outlook provided in late 2021. 2022 was always supposed to be a revenue trough due to the sunsetting of major programs, but given there is evidence that the acceleration into 2025 could be higher than initially expected.”

After the short-term disappointment, the long-term investment opportunity presents itself. Lockheed’s business opportunity is still ahead as governments, especially European nations, ramp up spending into the foreseeable future to respond to global security threats; the associated benefits will accrue to long-term shareholders. With the stock generally flat over the last three years, the increases to Lockheed’s business outlook is an opportunity to own the stock on the pullback.

In a cloudy macro environment, there’s clear visibility in Lockheed’s strong business outlook. LMT has steady cash flow and sports a healthy 2.85% dividend yield plus a decent buyback retiring annually 1.5%-2% of shares outstanding. With the stock trading around a 14 forward price-to-earnings and 11-times estimated 2023 earnings before interest, taxes, depreciation, and amortization, LMT is attractively priced, a discount to its defense peers, and worth owning into the wave of increased defense spending ahead.