We’re Raising Our Price Target for This Defense Spending Play
The rebound in key product deliveries and higher defense spending pave the way.
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* We are boosting our price target on Two-rated Lockheed Martin.
* Upside to our target will hinge on potential 2025 F-35 shipments, something we’ll have greater visibility on in the coming months.
* Our panic point for this position rises as well.
Following its June-quarter earnings call, we are boosting our price target for Lockheed Martin LMT to $540 from $520, to reflect rising F-35 shipments and increasing defense spending across the globe.
As we mentioned yesterday, the company’s backlog exiting the June quarter stood at more than two times annual revenue, and order inquiries suggest that backlog will rise further in the second half of 2024. Ongoing geopolitical tensions and NATO’s expanded membership are leading countries to increase defense budgets as a percentage of GDP. To put some context around this, this year 23 NATO allies are expected to meet or exceed the NATO 2% target, up from only three in 2014.
We continue to see Lockheed as a beneficiary of that spending, with margins improving as F-35 delivery volumes ramp and hit the eventual sweet spot. In terms of our price target, there is potential upside depending on F-35 deliveries in 2025 compared to 2024. While can safely assume there will be far more F-35s delivered compared to this year, the question is how many? We’ll have greater clarity on that when Lockheed updates its multi-year outlook in the coming months.
As we suspected would be the case, we are seeing a number of price target increases from Wall Street firms this morning and even a few rating upgrades. TD Cowen, for example, now rates LMT a Buy with a $560 target, up from $480, on the back of rebounding F-35 deliveries. Others, such as Wells Fargo and Baird, have lifted their targets to $519-$525 from $483-$488.
Following yesterday’s pop in LMT shares, we are maintaining our Two rating. Catalysts that could lead us to revisit that rating include clarity on the magnitude of F-35 deliveries in 2025 or LMT shares pulling back to the $455-$465 range. Alongside, lifting our price target, we’ll also raise our panic point for LMT to $425 from $385, which is just shy of our $432.45 cost basis for the portfolio’s position.
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At the time of publication, TheStreet Pro Portfolio was long LMT.
