Al Root

Amid an uncertain industry backdrop, defense contractor Lockheed Martin delivered a solid finish to 2024. The company's initial outlook for 2025, however, was mixed.

Investors likely will react cautiously given continuing fears that the newly created Department of Government Efficiency could result in spending cuts. The stock's starting point, however, will help.

Lockheed on Tuesday reported fourth-quarter earnings per share of $7.67, adjusted for expected losses on classified programs, from sales of $18.6 billion. Wall Street was looking for earnings of $6.62 a share from sales of $18.9 billion, according to FactSet.

The year "2024 was another successful and productive year for Lockheed Martin," said CEO Jim Taiclet in a press release. "Our 5% sales growth and record year-end backlog of $176 billion demonstrate the enduring global demand for our advanced defense technology and systems."

Fourth-quarter earnings looked better than expected, with sales a little light. The reverse situation is shaping up for 2025.

Looking ahead, Lockheed sees 2025 sales between $73.8 billion and $74.8 billion. The $74.3 billion midpoint is higher than the $73.1 billion Wall Street currently projects.

Operating profit margins, however, are expected to be just below 11% in 2025. That's a touch below 2024 and below what Wall Street is currently modeling.

Sales growth is a little better than Baird analyst Peter Arment expected, but he thought operating profit margins would improve. Arment rates Lockheed shares Hold and has a $540 price target on the stock.

As for bottom-line earnings, the midpoint of EPS guidance is $27.15. That's below the $27.88 Wall Street currently projects. Guiding below Wall Street can be a problem for any stock. Lockheed, however, typically guides conservatively. The company earned $27.99 a share in 2024. The midpoint of Lockheed's initial 2024 guidance was $26.

Management hosts a conference call at 11 a.m. Eastern time to discuss results. Investors and analysts will have questions about guidance and the outlook for overall defense spending in a new presidential administration.

Truist analyst Michael Ciarmoli rates Lockheed shares Buy. His target price is $579 a share. He acknowledges some of the headwinds but isn't dissuaded.

"We are opting to zig when others may zag, so in the face of DOGE-related fears," wrote Ciarmoli in a recent report. "Now is the time to buy defense stocks. The current U.S. budget environment is not the equivalent of [budget] sequestration 2.0 as the [global] threat level remains elevated."

"Sequestration" is short-hand for budget cuts of a decade ago designed to reduce federal deficits. Cuts had an impact. Defense spending fell between 2011 and 2016 before growing at about 5% annually since then, according to Federal Reserve data.

Ciarmoli also pointed out that defense contractors are trading at a near-20% discount to the broader market. A smaller discount of closer to 10% is normal based on the past few years of trading.

Lockheed stock, down about 10% over the past three months, trades for 18 times estimated 2025 earnings while the S&P 500 trades for closer to 22 times.

As Lockheed's fourth-quarter report showed, investing in the defense sector in 2025 won't be easy. Paying the right price for any stock will be key.

Write to Al Root at allen.root@dowjones.com

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January 28, 2025 07:30 ET (12:30 GMT)

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