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Why Lockheed Martin Rallied in October
Key Points
Lockheed delivered a beat-and-raise Q3.
Management also announced long-term procurement agreements with the Department of Defense.
The longer-term visibility spurred Wall Street analysts to hike their price targets.
Shares of Lockheed Martin (NYSE:LMT) rallied 25.1% in October, according to data from S&P Global Market Intelligence.
The largest defense contractor rallied on the back of strong third-quarter earnings last month. On top of the strong results, the company closed longer-term deals with the Department of Defense, earning increased confidence from the analyst community.
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Lockheed beats expectations as missiles and aircraft rule the day
In the third quarter, Lockheed saw its revenue rise 11.3% to $20.7 billion, while diluted earnings per share grew 14.6% to $7.95. Both figures handily beat analyst expectations. Management also raised its full-year guidance to a revenue range of $80 billion to $82 billion, up by $250 million on both ends, and diluted EPS to a range of $30.35 to $30.75, up from $29.95 to $30.65 previously.
Lockheed benefited from strong growth in its Aeronautics division, which produces the F-35 fighter jet, and Missiles and Fire Control, which is seeing outsize growth due to missile use in the war in Iran and the Russia-Ukraine conflict. Aeronautics rallied 13.2%, while Missiles and Fire Control grew 24.2%.
Management also announced that the Department of Defense had finalized a 10-year agreement for F-35s, with a minimum of 850 aircraft to be sold over the period, and Lockheed guaranteeing a production capacity of 156 aircraft per year. Guaranteeing a sales floor will enable Lockheed to fund the expansion itself, which should, in theory, reduce or delay government outlays. Lockheed also signed another agreement with the Department of Defense to accelerate production of the Joint Advanced Tactical Missile.
The long-term agreements were perhaps even a bigger deal than earnings results themselves. After earnings, Morgan Stanley analyst Kristine Liwag raised her price target on the stock from $690 to $835 per share. Liwag believes the long-term agreements not only boost Lockheed’s revenue outlook but also reduce the risk of future cash flows, justifying her big jump in valuation.
Image source: Lockheed Martin.
Lockheed Martin is the blue chip defense stock
Buoyed by the F-35 program and with a strong growth outlook for its missile business, to say nothing of its other segments, including the Space division and Lockheed’s famous Skunk Works research and development operation, the 2.5% dividend-yielding Lockheed Martin is the premier blue chip defense contractor to own in long-term portfolios.
While the new Congress may add to uncertainty, the biggest defense stock in the market appears to be shrugging that off for now in the wake of these new long-term agreements.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lockheed Martin. The Motley Fool has a disclosure policy.