VALUATION HIGHLIGHTS

1. Aeronautics (U.S. Aeronautics, Non-U.S. Aeronautics) constitute 40% of the Trefis price estimate for Lockheed Martin's stock.
2. Mission Systems & Training (US Mission Systems & Training, Non-US Mission Systems & Training) constitutes 25% of the Trefis price estimate for Lockheed Martin's stock.
3. Missiles & Fire Control (US Missiles & Fire Control, Non-US Missiles & Fire Control) constitutes 21% of the Trefis price estimate for Lockheed Martin's stock.

WHAT HAS CHANGED?

LMT Stock Performance

LMT stock has shown strong gains of 20% from levels of $355 in early January 2021 to around $430 now (Jan 24, 2024), vs. an increase of about 30% for the S&P 500 over this roughly 3-year period.

However, the increase in LMT stock has been far from consistent. Returns for the stock were 0% in 2021, 37% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that LMT underperformed the S&P in 2021 and 2023.

LMT Q4 2023 Performance

Lockheed Martin's Revenue declined marginally to $18.9 billion (versus $19.0 billion in the prior-year quarter), with Space segment seeing sales growth of 3% and al other segments seeing slight decline in sales. The company's EPS of $7.90 was up from the $7.79 figure seen in the prior-year quarter. The company expects the 2024 revenue to be between $68.5 and $70.0 billion and adjusted earnings to be between $25.65 and $26.35.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are the key drivers of Lockheed Martin's value that present opportunities for upside or downside to the Trefis price estimate:

Aeronautics

• U.S. Aeronautics EBITDA Margin: EBITDA margin for the Aeronautics division stood at 10.6% in 2022, compared to 8.0% in 2017. This change reflects the life cycles of the division's various programs, including the F-35 and F-22 programs. Looking forward, we expect margins to rise slightly to over 13% by the end of our forecast period, led by the expected ramp-up in F-35 production.
  However, if margins continue to fall to around 8% due to tighter price negotiations from the Pentagon, there could be a downside of 15% to Trefis price estimate for Lockheed Martin's stock.

U.S. Mission Systems and Training

• Mission Systems and Training Revenues: The segment revenues have grown from $9.8 billion in 2017 to $11.3 billion in 2022, driven by increased orders and a pre-existent backlog. It has since seen a gradual rise, and we forecast it to be north of $12.5 billion by the end of our review period.
  However, if revenues rise at a higher pace to about $18 billion over the Trefis forecast period, there could be an upside of about 10% to Trefis price estimate for Lockheed Martin's stock.

BUSINESS SUMMARY

Lockheed Martin is a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products, and services. It also provides a broad range of management, engineering, technical, scientific, logistics, system integration, and cybersecurity services.

SOURCES OF VALUE

Capable missile defense systems

With the growing threat of attack from airborne missiles, missile defense systems are in demand from governments of many countries including the U.S. Lockheed possesses multiple, highly capable and efficient missile defense systems which include the Aegis, Patriot Advanced Capability-3 (PAC-3), and Terminal High Altitude Area Defense (THAAD). Sales of these systems will likely bring significant contracts and revenues to the company in the coming years.

Chief contractor for the F-35 program

The F-35 is a multi-role combat aircraft being developed by Lockheed Martin. The aircraft is part of the Joint Strike Fighter (JSF) program, intended to replace a wide range of existing combat aircraft in the U.S., the U.K., Canada, and other countries. Over the coming years, the program is expected to occupy an even larger share of the company's top line, driven by its planned production ramp-up.

Looking ahead, as the production of the F-35 rises in the coming years, this program will drive a significant portion of Lockheed's value.

KEY TRENDS

High reliance on the U.S. government

About 73% of Lockheed's revenue comes from the U.S. government through its agencies such as the Department of Defense, Homeland Security, and NASA. As a result of this high reliance on government spending, Lockheed is highly vulnerable to spending cuts from the U.S. government.

For example, the U.S. government may likely cap all new discretionary spending for 2023 at 2022 levels, implying a $75 billion cut in the defense budget from the $857 billion passed in the last National Defense Authorization Act. A lower government defense spending will result in reduced overall contract volume for Lockheed.

High emphasis on cyber security

With increasing sophistication and growth in cyber attacks in recent years, IT security challenges are mounting for the U.S. government, which include cyber threats from foreign nations and terrorist organizations as well as virus/malware intrusions. We expect this trend to drive increased strengthening of the Federal IT infrastructure. This will likely maintain the demand for information systems services. Lockheed is one of the key providers of cybersecurity solutions.