Aerospace & Defense behemoth Lockheed Martin (NYSE: LMT) plays a major role in the West’s pledge to supply Ukraine with the arsenal it needs to successfully defend and reclaim its territory against the ongoing Russian invasion. These days, you are constantly hearing on the news that Western allies remain committed to supporting Ukraine through this endeavor for “as long as it takes.” This, of course, includes the constant resupply of ammunition and missiles utilized by HIMARS and other systems, which have proven vital for Ukrainians. The result is Lockheed Martin experiencing an order overflow, which should maintain its backlog at record levels.
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I have been consistently bullish on Lockheed Martin over the past couple of years (see my ratings below) due to its several qualities and critical role in the current geopolitical landscape.
Nevertheless, with shares now near an all-time high, I believe there are little to no gains to be made as we advance. Accordingly, I am neutral on the stock.
Why Lockheed Martin’s Supplies are Critical for Ukraine
Western Allies have been providing Ukraine with all sorts of military equipment, including several different supplies produced by Lockheed Martin. These include Javelin anti-tank missiles, which the Armed Forces of Ukrainian forces have been utilizing successfully against Russian armored vehicles, as well as the company’s PAC-3 and THAAD interceptor missiles, counter-battery radars, and guided rocket systems, all of which have been critical for Ukraine’s counter-offensive efforts.
The most critical supply, however, which makes all the difference for Ukrainians in this unfortunate war, is Lockheed Martin’s HIMARS. With HIMARS’ guided missiles able to fire up to a 270km range, Ukrainians can cut the Russian supply chains and hit Russian command centers from afar with high precision.
HIMARS has been so effective for Ukrainians that Lockheed Martin just won a $431 million contract from the U.S. Army to deliver M142 High Mobility Artillery Rocket System launchers at full pace in order to rapidly restock the U.S. and its allies. The U.S. and its allies are then likely to follow through and send these rockets to Ukraine, resulting in another replenishment contract for Lockheed Martin and so on. As long as this ongoing war persists, this is how the chain reaction will continue – sadly. With no signs of the ongoing conflict decompressing, Lockheed Martin’s future backlog should remain at elevated levels.
What’s This Mean for LMT’s Future Results and Backlog?
It’s important to know that major defense contractors operate on a backlog basis. The orders accumulate, and then companies such as Lockheed Martin start to deliver on this backlog while more orders accumulate. The greater the backlog, the greater the cash-flow visibility, which then reduces risks regarding Lockheed Martin’s future results. In fact, an extended backlog allows investors to predict Lockheed Martin’s medium-term performance more accurately, which is wonderful in terms of inspiring confidence in the stock and lessening uncertainty.
The company’s most recent Q3 results reflected its ongoing critical involvement in the West’s commitment to restocking Ukraine. Net sales came in at $16.6 billion, 3.8% higher year-over-year, as the company has been gradually expanding its production capacity to meet the underlying order overflow. Note that these systems take some time to produce and require heavy industrial scale. Thus, don’t expect to see double-digit revenue growth just because Lockheed Martin is accepting orders at scale. Instead, orders accumulate, resulting in a growing backlog.
Specifically, Lockheed Martin’s backlog grew nearly $5 billion year-over-year by Q3, closing the quarter at a massive $140 billion. The backlog now features a 1.3 book-to-bill ratio, which in simple terms, means that Lockheed Martin is currently signing more order value than its production capacity can deliver. Therefore, its revenues over the next 1-1.5 years are essentially guaranteed. All the company has to do is deliver. This is great in terms of enhanced visibility regarding its future financials, going back to my earlier point about a reduction in uncertainty linked to the stock.
Is LMT Stock a Buy, According to Analysts?
As far as sentiment amongst Wall Street analysts goes, Lockheed Martin has a Hold consensus rating based on four Buys, seven Holds, and two Sells assigned in the past three months. At $473.75, the average Lockheed Martin stock forecast implies 1.55% downside potential.
The Takeaway: LMT is Likely a Hold
In this one, I will have to agree with Wall Street analysts and support that Lockheed Martin is indeed a Hold. With shares up 45% over the past year, most gains to be made have likely already materialized.
Management reaffirmed its full-year 2022 EPS outlook, which they expect to land close to $21.55. This implies the stock is now trading at a forward P/E ratio of 22.3x. At best, this suggests Lockheed Martin’s future results are already priced in. If, instead, we are conservative, then the stock appears modestly overvalued. The valuation premium makes sense considering the company is currently enjoying fantastic tailwinds, but it should also hint toward limited upside potential, moving forward.
