Pick Either Lockheed Martin Stock Or Its Industry Peer – Both May Offer Similar Returns

LMT: Lockheed Martin logo
Lockheed Martin

We think Lockheed Martin stock (NYSE: LMT) and Northrop Grumman stock (NYSE: NOC) may offer similar returns over the next few years. Although LMT is trading at a comparatively lower valuation of 1.8x trailing revenues than 2.1x for NOC, this gap in the valuation can be attributed to Northrop Grumman’s superior profitability, as discussed below.

Looking at stock returns, both LMT and NOC have outperformed the broader indices, with LMT rising 22% and NOC up 25% so far this year, compared to a 10% fall for the S&P500 index. In the sections below, we discuss the possible stock returns for LMT and NOC in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Lockheed Martin vs. Northrop GrummanWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Lockheed Martin’s Revenue Growth Is Better

  • Both Lockheed Martin and Northrop Grumman have seen a decline in revenue over the last twelve months. While Lockheed Martin’s sales declined 4%, Northrop Grumman saw its sales drop 3% over this period.
  • However, looking at a longer time frame, Lockheed Martin has outperformed, with its sales seeing an average growth rate of 7.7%% to $67.0 billion in 2021, compared to $53.8 billion in 2018, while Northrop Grumman saw its revenue rise at an average growth rate of 6.0% to $35.7 billion in 2021, compared to $30.1 billion in 2018.
  • For Lockheed Martin, the strong revenue growth over the recent past has been led by higher production volume for its Sikorsky helicopter programs, AC-3, Long Range Anti-Ship Missile (LRASM), and the Joint Air-to-Surface Standoff Missile (JASSM) program, among others.
  • Furthermore, the ongoing Ukraine-Russia conflict has increased focus on the defense sector stocks. New business awards will likely drive the company’s performance in the near term, with possible increased defense spending, especially by NATO members.
  • Northrop Grumman’s space segment has observed strong growth in recent years driven by higher strategic missile sales. Notably, the company’s order backlog almost doubled in recent years, from $42 billion in 2017 to $80 billion currently, driven by growing demand for space systems.
  • Our Lockheed Martin Revenue and Northrop Grumman Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Northrop Grumman’s revenue is expected to grow faster than Lockheed Martin’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 8.6% for Northrop Grumman, compared to a 6.2% CAGR for Lockheed Martin, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Northrop Grumman Is More Profitable

  • Lockheed Martin’s current operating margin of 10.2% is much lower than 26.6% for Northrop Grumman.
  • This compares with 14.4% and 8.8% figures in 2019, before the pandemic.
  • Lockheed Martin’s free cash flow margin of 13.9% is better than 10.0% for Northrop Grumman.
  • Our Lockheed Martin Operating Income and Northrop Grumman Operating Income dashboards have more details.
  • Looking at financial risk, Lockheed Martin’s 10.1% debt as a percentage of equity is lower than 33.2% for Northrop Grumman, while its 3.4% cash as a percentage of assets is lower than 8.3% for the latter, implying that Lockheed Martin has a better debt position while Northrop Grumman has more cash cushion.

3. The Net of It All

  • We see that Lockheed Martin has demonstrated better revenue growth, has a better debt position, and is available at a comparatively lower valuation. On the other hand, Northrop Grumman is more profitable and has a better cash cushion.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both LMT and NOC are likely to offer similar returns over the next few years.
  • The table below summarizes our revenue and return expectations for the two companies over the next three years and points to an expected return of 15% for Lockheed Martin over this period vs. a 13% expected return for Northrop Grumman, implying that investors can choose either of the two or both if they are looking to invest in the Aerospace & Defense industry, based on Trefis Machine Learning analysis – Lockheed Martin vs. Northrop Grumman – which also provides more details on how we arrive at these numbers.

While LMT and NOC may offer similar returns, it is helpful to see how Lockheed Martin’s Peers and Northrop Grumman’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Marine Products vs. Amerco.

Despite higher inflation and the Fed raising interest rates, Lockheed Martin has seen a rise of 22% this year, while Northrop Grumman is up 25%. But can they drop from here? See how low can Lockheed Martin stock go and how low can Northrop Grumman stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Aug 2022
MTD [1]
YTD [1]
Total [2]
LMT Return 4% 22% 73%
NOC Return 1% 25% 108%
S&P 500 Return 0% -13% 85%
Trefis Multi-Strategy Portfolio -1% -14% 236%

[1] Month-to-date and year-to-date as of 8/23/2022
[2] Cumulative total returns since the end of 2016

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