Lockheed Martin's (LMT) $1.7 billion in pre-tax charges on two classified programs surprised investors, while its 2025 guidance was revised higher for sales and free cash flow, Morgan Stanley said in a Wednesday report.

The charges at the company's Missiles and Fire Control business of about $1.31 billion pre-tax in Q4 appeared to cover the initial fixed-price portion of the classified program, after which pricing talks with the client should re-open, the note said.

Meanwhile, management suggested that the charges at the Aeronautics division of about $410 million pre-tax in Q4 along with improved oversight processes, significantly de-risk this program, the report said, adding it's "not clear future charges related to this effort at Aero can be entirely discounted."

"The sizable charges incurred in the quarter at MFC and Aero have come at a time when the new administration is reportedly gearing up to take a hard look at federal contracting structures,"

the note said.

The report also said the 2025 outlook improved for sales and free cash flow growth, but margin erosion and non-operating items drive EPS lower by about 3% from a year ago.

Morgan Stanley cut its price target for the stock to $525 from $555, while keeping its equal-weight rating.

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