Record Backlog And F-35 Deliveries Will Boost Future Success

Key Takeaways

• Strong backlog growth across all business areas indicates sustained demand, driving future revenue and potential improvements in net margins and earnings.
  
• Strategic investment in R&D and partnerships may enhance competitive edge, leading to higher-margin revenue streams and operational efficiencies.
  
• Continued reliance on classified programs introduces potential volatility in earnings, while new contracts face challenges affecting cash flow and financial health.

Catalysts

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

• The record-high backlog of $176 billion, with all four business areas experiencing backlog growth and a book-to-bill ratio greater than 1, indicates sustained demand that will likely drive future revenue growth.
  
• Expected mid-single-digit sales growth along with a return to 11% operating profit margin and double-digit free cash flow per share growth in 2025 highlights the potential for improved net margins and earnings.
  
• Investment of $3.3 billion in R&D to enhance programs like the F-35 and internal digital transformations could lead to revenue growth and operational efficiencies, positively impacting net margins over time.
  
• Projected deliveries of 170 to 190 F-35 aircraft in 2025, up from 110 in 2024, suggest potential for significant revenue and earnings growth, particularly if international demand remains strong.
  
• Continued collaboration and strategic partnerships with technology companies for innovations in AI, 5G, and digital technologies may increase Lockheed Martin's competitive edge, potentially leading to higher-margin revenue streams.

Lockheed Martin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lockheed Martin's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 8.9% in 3 years time.
• Analysts expect earnings to reach $7.1 billion (and earnings per share of $31.5) by about March 2028, up from $5.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.7x on those 2028 earnings, which is the same as it is today today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 32.2x.
• Analysts expect the number of shares outstanding to decline by 1.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.74%, as per the Simply Wall St company report.

Lockheed Martin Future Earnings Per Share Growth

Risks

• The reliance on classified programs, which experienced significant unplanned charges, suggests potential volatility in earnings and profit margins as future unexpected costs may arise.
  
• Increasing new contracts may not translate to immediate revenue due to continued program challenges, which could impact near-term cash flow and financial health despite backlog growth.
  
• Defense budget trade-offs under new government policy could lead to variations in projected procurement rates, potentially affecting revenue streams from key programs like the F-35.
  
• The supply chain, while improving, still presents bottlenecks that could limit the company's ability to convert backlog into sales, affecting both revenue and the cash conversion cycle.
  
• Fixed-price contracting trends could introduce higher risks if not managed carefully, potentially affecting profit if programs encounter unforeseen technical challenges or delays.

Valuation

• The analysts have a consensus price target of $544.624 for Lockheed Martin based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $685.0, and the most bearish reporting a price target of just $418.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $79.6 billion, earnings will come to $7.1 billion, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 6.7%.
• Given the current share price of $469.28, the analyst price target of $544.62 is 13.8% 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.