Supply Chain Issues And Shifting Budgets Will Constrain Defense Programs

Key Takeaways

• Heavy dependence on major defense programs increases risk from shifting geopolitical budgets and evolving defense priorities.
  
• Lagging investment in emerging defense technologies and rising ESG pressures threaten long-term competitiveness and earnings growth.
  
• Diverse demand for advanced defense systems, global modernization trends, and strategic investments in technology position Lockheed Martin for sustained growth and resilient profitability.

Catalysts

An aerospace and defense company, engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide.

• Lockheed Martin is increasingly exposed to the risk that geopolitical efforts in developed economies will shift budgets away from large-scale defense programs in favor of renewable energy and healthcare, which threatens demand for key revenue-generating platforms such as the F-35 and missile defense systems and could drive multi-year declines in revenue growth.
  
• The company's continued high reliance on a small set of large programs, including the F-35 and classified Aeronautics projects, creates significant vulnerability to evolving defense priorities or budget cuts; any reductions or cancellations could lead to substantial revenue concentration risk and increased earnings volatility.
  
• Persistent cost overruns and newly identified reach-forward losses on legacy and classified programs highlight ongoing supply chain pressures and potential future margin compression, especially as fixed-price contracts become more common; this is likely to weigh on net profit margins for multiple years.
  
• Industry-wide advances in digital warfare and autonomy are rapidly shifting defense spending toward cyber and AI-driven solutions, while Lockheed Martin remains heavily invested in traditional hardware platforms, risking product obsolescence and a shrinking order backlog over time.
  
• Mounting global ESG and ethical investing momentum is expected to drive continued capital flight from defense contractors, potentially raising Lockheed Martin's funding costs and placing downward pressure on valuation multiples, ultimately constraining future earnings growth and shareholder returns.

Lockheed Martin Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Lockheed Martin compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Lockheed Martin's revenue will grow by 3.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.9% today to 8.8% in 3 years time.
• The bearish analysts expect earnings to reach $7.0 billion (and earnings per share of $31.25) by about July 2028, up from $4.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, down from 23.4x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 36.5x.
• Analysts expect the number of shares outstanding to decline by 2.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Lockheed Martin Future Earnings Per Share Growth

Risks

• Real-world combat effectiveness, ongoing operational relevance, and customer reliance on Lockheed Martin's advanced systems such as the F-35, PAC-3, THAAD, and next-generation missile defense platforms are driving both national and international demand, which supports strong future revenue and order backlog.
  
• Robust and growing international demand for key programs, particularly the F-35, is offsetting any potential slowdowns in U.S. procurement and diversifying the revenue base, providing resilience and upside for revenue growth going forward.
  
• Lockheed Martin is positioned to capture multi-year growth opportunities from government modernization efforts, including increases in munition spending, new procurement programs like CH-53K and PAC-3, and strategic investments from allies, all supporting sustained top-line growth and profitability.
  
• Strong backlog of $167 billion, anticipated record backlog by year-end, and multiple significant awards expected in the near term provide a solid financial foundation for sustained cash flow generation and earnings stability.
  
• Continued investment in advanced technologies such as hypersonics, space, missile defense, and digital engineering, as well as readiness for major U.S. initiatives like Golden Dome, put the company at the forefront of long-term defense spending trends, underpinning long-term earnings growth and margin expansion.

Valuation

• The assumed bearish price target for Lockheed Martin is $398.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Lockheed Martin's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $670.0, and the most bearish reporting a price target of just $398.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $79.7 billion, earnings will come to $7.0 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $421.17, the bearish analyst price target of $398.0 is 5.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.