Lockheed Martin Q2 Earnings Preview: Preparing For Takeoff

Investment Thesis

Lockheed Martin Corporation (NYSE:LMT) is expected to deliver positive results and strategically position itself to capitalize on global geopolitical tensions. The company's forward-looking analysis focuses on three crucial areas: anti-fragility in defense production, 21st-century security, and global deployment of production and sustainment.

By absorbing shocks, incorporating digital technology, and strengthening collaboration, LMT focuses on enhancing its production system, improving military effectiveness, and expanding its market presence. With a positive financial outlook for 2023 and a strong position in the defense industry, Lockheed Martin can generate value for investors in the coming years, despite the underperformance year-to-date.

Lockheed Martin's Strategic & Financial Directions

Financially, the company's financial results for the Q1 2023 were solid, with sales reaching $15.1 billion and year-over-year growth of 1%, with its space segment seeing significant growth at 16%. Thus, the company remains on track to meet its financial expectations for the entire year and expects a return to growth in 2024.

Lockheed Martin's strategic investments include advanced technologies like hypersonics, 5G, joint all-domain operations, and directed energy. The company aims to deliver the best technology at the best value and is actively pursuing contracts such as the performance-based logistics (PBL) contract for the F-35 program. Supply chain issues and labor shortages are ongoing challenges, but Lockheed Martin is implementing best practices to improve reliability.

Further, during Q1 2023, Lockheed Martin earned 73% of its net sales from the U.S. government, with 63% from the Department of Defense (DoD). The company also has international customers, accounting for 26% of net sales, including foreign military sales contracted through the U.S. government and 1% from U.S. commercial and other customers.

Strategically, Lockheed Martin is focused on achieving anti-fragility by absorbing shocks like the COVID-19 pandemic and rapidly increasing production capacity when needed. The company pursues long-term contracts, long lead times, and doubling production within a shorter time frame to capitalize on revenue opportunities and strengthen its production system. Further, collaboration with commercial technology and telecom leaders is helping LMT accelerate the adoption of digital techniques in national defense, enhancing military capabilities through ongoing programs and prototypes.

Additionally, Lockheed Martin emphasizes global deployment of production and sustainment, strategically internationalizing their operations instead of simply selling products to individual countries. As a result, this approach enhances antifragility, customer support, and market presence. The stability in funding provided by the Biden budget aligns well with Lockheed Martin's growth trajectory, as it includes sufficient funding for programs like the F-35 and munitions.

Further, Lockheed Martin anticipates growth resuming in 2024, driven by deliveries, sustainment, and modernization efforts. While the production of the F-35 program will remain flat, sustainment is expected to grow at a CAGR of 6% over the next five years. The company also positions itself for the Next Generation Air Dominance (NGAD) program by investing in high-performance stealth, advanced missile technology, and 21st-century security capabilities.

Notably, the F-16 program is experiencing a resurgence, with a backlog of 127 aircraft and an expected production rate of three per month by the end of 2024. Lockheed Martin considers the F-16 Block 70 aircraft a 4.5-generation fighter, and there is demand for this advanced platform. Challenges in the supply chain, including COVID-19 impacts and slower ramp-up, are acknowledged, but stability is expected, and cost impacts are anticipated to improve once the production line stabilizes.

Furthermore, Lockheed Martin is actively involved in developing hypersonic strike and defense systems, but the growth potential for hypersonic programs remains uncertain. Directed energy is another technology of interest with substantial growth potential. The company's transition from legacy space programs to new programs in the space business has been successful, focusing on intelligence agencies and the Defense Department and integrating space assets into its overall mission.

Finally, with recent wins in Australia's military communication satellite program and the Australian government's agreements to purchase High Mobility Artillery Rocket Systems (HIMARS), Lockheed Martin's international presence and collaborations are expanding. Therefore, the company sees potential growth beyond the U.S. Department of Defense budget through international projects.

LMT Q2 Earnings Expectations & Bullish Outlook

Lockheed Martin is expected to report positive financial results for Q2, with an estimated EPS of $6.45, indicating flat quarter-over-quarter (QoQ) growth and a year-over-year (YoY) growth of 556%. The revenue estimate is $15.89 billion, representing QoQ and YoY growth of 5% and 3%, respectively. The expected revenue growth may prevent a cyclical downturn, serving as a bullish catalyst for Lockheed Martin's market valuations.

Additionally, the company reaffirmed its fiscal year (FY) outlook for 2023 in April, which includes sales of $65–66 billion, segment operating profit of $7.255–7.355 billion, diluted EPS of approximately $26.60-26.90, cash from operations of least $8,150 billion, capital expenditures of around $1.950 billion, free cash flow of at least $6.200 billion, and share repurchases of approximately $4.000 billion.

The U.S. budget environment, particularly defense spending and timely funding, can impact Lockheed Martin's financial performance. For example, the FY 2023 Omnibus Appropriations Act increased national defense funding, providing $816.7 billion for the DoD base budget. Favorably, the FY 2024 defense budget request of $866 billion has also been submitted. However, if not raised, the debt ceiling issue could disrupt funding obligations and have wider financial and economic repercussions.

Notably, Lockheed Martin's product sales in Q1 2023 were comparable to the same period in 2022. Higher product sales at Space offset lower Aeronautics, Missiles, and Fire Control (MFC) sales. Service sales increased by 5%, primarily due to higher sales in aerospace for F-35 sustainment contracts.

Finally, the F-35 program remains a significant focus for Lockheed Martin, with ongoing production contracts, sustainment activities, and new development efforts. The U.S. government and international partners continue to demand the F-35 aircraft strongly.

However, aircraft deliveries were impacted in Q1 2023 due to an issue with the Government Furnished Equipment (GFE) engine, resulting in a pause in flight operations. As a result, the company expects to deliver fewer aircraft than the prior plan of 147–153 in 2023 but anticipates no material impact on the financial outlook.

Capitalizing On Global Defense Trends & Geopolitical Dynamics

As one of the leading defense contractors, Lockheed Martin is well-positioned to benefit from current global defense spending trends and geopolitical dynamics. The company's strong start to the year and reaffirmation of financial expectations for 2023 indicate a positive outlook. The expected return to growth in 2024 aligns with the projected increase in global defense spending fueled by geopolitical instability and great power competition.

The ongoing Russia-Ukraine conflict and the escalating U.S.-China rivalry are key drivers for increased defense spending. These geopolitical tensions have revived the traditional West vs. East fault line and led to a focus on maintaining military overmatches with adversaries. This translates into higher demand for next-generation defense systems and technologies. With its extensive portfolio of advanced defense capabilities, Lockheed Martin is well-positioned to benefit from this trend.

Furthermore, the defense industrial base in the U.S. and Europe is gearing up to ramp production rates to meet the demand for defense equipment. Depleting stockpiles of munitions, missiles, and weapons due to their extensive use in Ukraine necessitates replenishing inventory levels. This presents an opportunity for Lockheed Martin to increase its production and fulfill international orders.

Looking ahead, global defense spending is projected to reach record levels of $2.5 trillion by 2027. This indicates a sustained and growing demand for defense capabilities as countries seek to modernize their militaries and maintain their strategic edge. Lockheed Martin's commitment to free cash flow per share growth and its focus on 21st-century security solutions complement this defense outlook.

Finally, the company's strategic initiatives, such as the Tech Refresh 3 (TR3) upgrade for the F-35 aircraft and the Evolve initiative for collaboration with external partners, demonstrate its commitment to staying at the forefront of technological advancements and addressing emerging challenges. By investing in research and development and partnering with a broader range of companies, Lockheed Martin aims to provide innovative solutions to meet evolving defense requirements.

LMT Stock Poised For Bullish Breakout At Critical Support Level

Technically, Lockheed Martin's stock price is following a sideways trend. With resistance at $467 tested multiple times and an elevated support level at $448, it will likely experience a significant bullish move with a close above $467.

However, Relative Strength Index (RSI) levels do not indicate an oversold (below 30) or overbought (above 70) level. Additionally, the price is moving at the 200-day exponential moving average (EMA), a critical support level for the stock. Therefore, LMT offers an attractive entry point for a long position with a short stop-loss below the 200-day EMA.

Takeaway

In conclusion, Lockheed Martin may capitalize on the current global defense spending trends and geopolitical dynamics, as indicated by its strong financial performance and positive outlook. The company's extensive portfolio of advanced defense capabilities, including the F-35 program and hypersonic technologies, benefits it from the increasing demand for next-generation defense systems.

With the projected growth in global defense spending, the ongoing Russia-Ukraine conflict, and the U.S.-China rivalry, Lockheed Martin is poised for success. The company's strategic initiatives, such as the TR3 upgrade and the Evolve initiative, demonstrate its commitment to innovation and staying ahead in the industry. Lockheed Martin's bullish outlook aligns with the favorable defense landscape and its strong capabilities.

Author of Yiazou Capital Research

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I am the founder of Yiazou Capital Research, a stock-market research platform designed to elevate your due diligence process through in-depth analysis of businesses.

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