Lockheed Martin Earnings: A Generally Flat Quarter Emphasizes Cash Flow; Fair Value Estimate $482

Lockheed Martin LMT reported third-quarter results on Oct. 17 reflecting single-digit growth and fairly stable profits across most of its businesses. Management reaffirmed its 2023 expectations and increased its planned share repurchases by $2 billion. We have slightly increased our fair value estimate from $480 to $482 per share due to minor adjustments to our long-term forecasts.

We would characterize Lockheed’s third quarter as fairly typical of our ongoing expectations for the company, filled with short-term fluctuations of delivery volumes in a handful of significant programs like the F-35, HIMARS missiles, Aegis naval defense systems, and GPS satellites along with incremental margin adjustments. We trimmed some of our longer-term growth rates for the company’s aerospace and missiles business to bring these closer to our long-term forecast of 1.9% average growth of the overall budget available to defense contractors, boosted somewhat by growth prospects in sales to non-U.S. allied militaries. We also projected ongoing recoveries of the operating cost of pension plans embedded in the firm’s defense contracts, which we had previously curtailed in our longer-term forecasts. Together, these changes resulted in the negligible $2 increase to our fair value estimate.

The company pointed to near-term uncertainty surrounding the U.S. defense budget, which is once again subject to political maneuvering and gridlock amid a heightened geopolitical risk atmosphere. Given that the defense industry has recent practice accommodating defense spending disruptions due to Congress failing to pass budget bills on time, we don’t foresee meaningful or lasting disruption to Lockheed Martin. We have also not altered our view that the company has a well-positioned and fairly diversified portfolio of defense contracts and remains likely to dominate the U.S. defense contracting industry for the foreseeable future on many metrics, not least returning most of its free cash flow to investors.