How Lockheed Martin Crushed Its Q1 Earnings Report

Lockheed Martin stock got little credit for beating earnings last week. Could its stock be a bargain today?

Lockheed Martin (LMT -0.28%) reported big earnings beats on both the top and bottom lines in its earnings report last week — not that you would guess it from the stock price. The company beat sales predictions by 7.5% and earnings estimates by 10%, yet Lockheed stock ended the week below where it began.

Is that fair?

Lockheed’s Q1 earnings

For Q1 2024, Lockheed earned $6.39 on sales of $17.2 billion. Sales increased nearly 14% year over year, but earnings declined a bit — down about 3% year over year. Free cash flow came in even lower than reported earnings. That’s the opposite of what you’d expect to happen, so to an extent it actually was fair for investors to not bid up Lockheed stock despite the company beating expectations.

Why didn’t Lockheed do even better in Q1? And why are investors upset with it despite the beat?

Strange as it is to say since we’re in the middle of a global bull market for weapons systems, in general, and for missiles, in particular, but Lockheed’s sole underperforming business in Q1 was its missiles and fire control division. Out of Lockheed’s four main divisions, each of which enjoyed growing sales in the quarter, the missiles business was the only one to show declining profits — down 18%, despite sales climbing 25%.

The reason? Lockheed is working hard to ramp up production of pretty much every kind of missile it makes: Guided Multiple Launch Rocket Systems (GMLRS), High Mobility Artillery Rocket Systems (HIMARS), Joint Air-to-Surface Standoff Missiles (JASSM), Long Range Anti-Ship Missiles (LRASM), and PAC-3 Patriot and Terminal High Altitude Area Defense (THAAD) interceptors, too. Presumably, it’s the very same production expansion that’s both enabling higher revenue growth and entailing costs that depress profits.

As for the other divisions, aeronautics sales grew 9%, space 10%, and rotary and mission systems 16%. Profits grew in each of these three units, with the biggest improvement seen in space (profits up 16%) and rotary — profits up 25%. Aeronautics was the outlier, showing good sales growth but little improvement in profits, belying hopes that the F-35 fighter jet program would get steadily more profitable as it scales up in size.

A short side trip to space

I want to say a few words on Lockheed’s space business — space being the industry I focus on. Lockheed is the world’s biggest pure-play defense company, so it’s no surprise that its “space” business is primarily military in nature. The company cited higher Fleet Ballistic Missile (FBM) production, as well as money from its just-won $17.7 billion Next Generation Interceptor (NGI) project as contributing to revenue growth, as well as $115 million from “national security” satellites.

Lockheed also mentioned that it booked $30 million in profit from its 50-50 ownership (alongside Boeing) of United Launch Alliance. After launching just three rockets in all of 2023, ULA launched once in Q1 2024 and again at the start of Q2 2024. Management credited this “higher launch volume” for contributing a bit more profit to its bottom line.

More important to investors is that, because we know that (1) ULA launched only one single rocket in the quarter, (2) Lockheed got half the profit from that launch, and (3) this profit was $30 million, we can presume that this launch earned a total profit of $60 million for ULA.

ULA is a private space company, so it’s difficult to gauge its profitability. But thanks to Lockheed’s earnings report, we can now put a tentative value on each launch the company conducts — $60 million — and apply that to the rates the government pays the company for future launches to at least guess at a profit margin. And of course, we can compare that amount to the profit margin of Lockheed’s publicly traded space rivals to determine whether ULA is winning or losing the space race.

Now that Lockheed has let this secret slip, let’s make sure to remember it.

Is Lockheed Martin stock a buy?

As for the rest of Lockheed Martin, based on last week’s data, we know the stock sells for about 17 times trailing earnings and 1.7 times trailing sales. According to data provided by S&P Global Market Intelligence, Lockheed Martin averaged only about a 1.2x price-to-sales ratio over the first 20 years of this 21st Century — so a 1.7x sales ratio seems on the expensive side, historically. Regarding earnings, however, Lockheed stock usually trades closer to a 22 price-to-earnings ratio (P/E) than its current 17 P/E, implying that from a profits perspective, Lockheed stock is historically cheap.

As a conservative investor, I’m inclined to avoid Lockheed because of its high price-to-sales ratio (P/S). That being said, if Lockheed can keep its profit margins as high as they currently are, I might be persuaded its stock is actually a buy.

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