Is Lockheed Martin Stock an Obvious Buy Right Now?

Key Points

• The end market outlook continues to improve for defense companies.

• There appear to be some structural reasons why defense companies are struggling to expand profit margins.

• 10 stocks we like better than Lockheed Martin ›

A combination of ongoing geopolitical conflict, NATO enlargement, and a recent commitment by NATO members to ramp up defense spending to 5% of gross domestic product (GDP) by 2035 would appear to make a leading defense stock like Lockheed Martin (NYSE: LMT) a highly attractive stock, so let's take a closer look at it.

The investment case for Lockheed Martin

Lockheed's 2.8% dividend yield strengthens the bulls' case, as well as its undemanding price-to-free cash flow (FCF) multiple of 16.5 times, which is at the midpoint of management's full-year 2025 guidance. Moreover, its customer base, which includes defense departments backed by government money, is as reliable as it comes.

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That said, it's far from clear that Lockheed is quite the no-brainer investment it appears to be. The key argument against it is that it appears to be becoming increasingly difficult for defense companies to deliver increasingly complex projects on time and within budget. For example, losses on Boeing's fixed-price development programs have led its defense business to report multibillion-dollar losses in recent years. In addition, RTX has taken charges on terminated fixed-price development contracts in recent years.

Lockheed Martin also has its share of scars to show. Continued delays on the Technology Refresh 3 on the F-35 fighter have damaged confidence and added to the program's already considerable cost overruns.

Image source: Getty Images.

It gets worse. Lockheed Martin recently reviewed its major legacy programs and promptly announced a $1.8 billion loss on some of them; these charges are a clear indication that the programs are not progressing as planned. In addition, CEO Jim Taiclet told investors that he acknowledged the losses on a classified program are "significant."

Simply put, whether it's the government negotiating tougher terms, the increasing complexity of defense programs adding costs, or Lockheed's own execution, there do appear to be margin expansion and cost estimation challenges for Lockheed and other defense companies, which preclude Lockheed from being an obvious buy stock.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.