Digital Defense And Hypersonic Trends Will Unlock Global Demand

Key Takeaways

• Urgent global defense needs and Lockheed's technological edge are fueling unprecedented long-term contracts and robust, compounding recurring revenue growth.
  
• Transition to proven, high-demand platforms and space market expansion are set to drive significant improvements in margins, free cash flow, and portfolio diversification.
  
• Heavy reliance on legacy programs and the F-35 exposes profitability to execution missteps, shifting defense trends, regulatory scrutiny, and intensifying international competition.

Catalysts

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

• Analyst consensus expects meaningful growth from Lockheed's next-generation air and missile defense integration (F-35, F-22, missile defense, Golden Dome), but this view may significantly understate the magnitude and speed of order flow as U.S./allied defense priorities and near-peer threats drive urgency, enabling Lockheed to capture record-breaking multi-year contracts and materially accelerate both backlog and recurring revenue growth.
  
• Analysts broadly agree on incremental margin and cash flow improvement from digital transformation and contract discipline, but the recent program write-downs and management overhaul actually position Lockheed for a step-function increase in future net margins and free cash flow as high-risk legacy programs roll off and production shifts almost entirely to proven, high-demand, higher-margin platforms.
  
• The rapidly rising demand for advanced missile and hypersonic weapons, combined with Lockheed's strong manufacturing and innovation lead in these technologies, uniquely position the company to achieve outsized long-run earnings growth as global defense buyers aggressively modernize arsenals in response to sharpening geopolitical tensions.
  
• Lockheed's unmatched, real-world demonstrations of integrated combat effectiveness-including stealth, missile defense, and command/control-are now driving a wave of allied procurement (NATO, Indo-Pacific) and solidifying multi-cycle, long-term contracts that offer rare revenue compounding, high visibility, and expanding scale benefits across the portfolio.
  
• A structural shortfall in allied commercial and military space and satellite assets is opening up an underappreciated, multi-billion dollar addressable market for Lockheed's space segment; successful execution here, supported by accelerating U.S. government and private investment, will diversify revenue streams and support significant operating profit expansion.

Lockheed Martin Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Lockheed Martin compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Lockheed Martin's revenue will grow by 4.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 5.9% today to 9.6% in 3 years time.
• The bullish analysts expect earnings to reach $7.9 billion (and earnings per share of $35.96) by about August 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 bullish analyst cohort, the company would need to trade at a PE ratio of 21.0x on those 2028 earnings, down from 23.8x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 36.3x.
• 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 8.11%, as per the Simply Wall St company report.

Lockheed Martin Future Earnings Per Share Growth

Risks

• Cost overruns, schedule delays, and persistent performance issues on major legacy and classified programs, as seen with the $1.8 billion in charges and recurring losses, highlight systemic execution risk that can continue to pressure profit margins, reduce net earnings, and force further downward revisions to future financial guidance.
  
• The company's overreliance on the F-35 program for a substantial portion of revenue leaves it exposed to risks from reductions in U.S. Department of Defense orders, international customer uncertainty, and ongoing debates over defense budgets, all of which threaten future revenue growth and operating margin stability.
  
• Heightened global ESG scrutiny, growing anti-defense sentiment among institutional investors, and potential increases in compliance and reputational costs could depress the share price by limiting access to capital and depressing valuation multiples going forward.
  
• Intensifying global competition from state-sponsored defense contractors, particularly from China and emerging suppliers, may erode Lockheed Martin's international market share, forcing price concessions and putting long-term revenue and profitability at risk.
  
• Secular shifts in national security spending-toward software-centric, digital, and non-kinetic warfare solutions-risk disintermediating traditional hardware-focused primes like Lockheed Martin, undermining its ability to sustain revenue growth and protect net margins over the long term.

Valuation

• The assumed bullish price target for Lockheed Martin is $601.7, which represents two standard deviations above the consensus price target of $487.16. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be $82.9 billion, earnings will come to $7.9 billion, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 8.1%.
• Given the current share price of $428.24, the bullish analyst price target of $601.7 is 28.8% higher.
• 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.