New Lockheed Price Target After Huge Breakout
The defense giant is forcing managers to increase long-side exposure.
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On Thursday morning, defense giant Lockheed Martin (LMT) released the firm’s second quarter financial results. It appears that, for one, the “gang that couldn’t (actually they can) shoot straight” finally put a very nice three-month period together. Improving the mood for investors in the defense space, RTX (RTX), which is the old Raytheon, also had a nice quarter.
For the three-month period ending June 28, Lockheed Martin posted a GAAP EPS of $7.94 on revenue of $20.06 billion. These top- and bottom-line results both easily crushed expectations while that sales print was good for annual growth of 10.5%. The firm can now boast a $230 billion order backlog, inclusive of the multi-year contract awarded to produce THAAD (hypersonic) interceptors.
Chair, president and CEO Jim Taiclet commented in the press release:
“These results are powered by consistent performance on the commitments we’ve made and by our investments to support the missions our customers will face next. Over the quarter, we took a major step forward in transforming munitions production, putting the framework agreements we announced earlier this year into action by signing a $35 billion multi-year contract with the Missile Defense Agency for THAAD. We continue to innovate at the speed our customers’ missions demand, taking our Sanctum counter-drone system from concept to successful live fire testing in just 45 days by combining a battle manager, radar, launcher, and combat-proven missile into one engagement chain.”
Operations
As total sales grew 10.5% to $20.063 billion, business segment operating income grew 279% to $2.162 billion and total consolidated operating profit improved 231% to $2.479 billion. After accounting for interest, taxes and all other income and expenses, GAAP net income soared to $1.836 billion (+437%). This worked out to a GAAP EPS of $7.94, up from the year-ago comp of $1.46.
Segment Performance
Aeronautics generated sales of $8.112 billion (+9.3%), producing an operating profit of $760 million (up from -$98 million) on an operating margin of 9.4% (up from -1.3%).
Missile & Fire Control generated sales of $4.101 billion (+19.5%), producing an operating profit of $594 million (+24%) on an operating margin of 14.5% (up from 14%).
Rotary & Mission Systems generated sales of $4.354 billion (+9%), producing an operating profit of $437 million (up from -4.3%) on an operating margin of 10% (up from -4.3%).
Space generated sales of $3.496 billion (+5.7%), producing an operating profit of $371 million (+2.5%) on an operating margin of 10.6% (down from 10.9%).
Guidance
For the full fiscal year, Lockheed now projects net sales of $79.75 billion to $81.75 billion. This brings the midpoint of the range above the high end of the firm’s previously issued guidance of $77.5 billion to $80 billion. Full-year diluted EPS is now seen at $29.95 to $30.65, up from prior guidance of $29.35 to $30.25. This brings the low end of the new range above the $29.90 that Wall Street had been looking for. Projections for full year free cash flow were increased from $6.5 billion to $6.8 billion to $7 billion to $7.2 billion.
Fundamentals
For the period reported, Lockheed generated operating cash flow of $3.235 billion. Out of that number came capex spending of $318 million. This left free cash flow of $2.917 billion, up from -$150 million for the year-ago period.
Turning to the balance sheet, Lockheed ended the quarter with a cash position of $3.791 billion and inventories of $4.411 billion. This puts current assets at $28.401 billion. Current liabilities add up to $23.809 billion. There are contract liabilities but there is no short-term debt. This puts the firm’s current and quick ratios at 1.19 and 1.01, respectively, which passes muster for a large industrial type operation.
Total assets amount to $62.45 billion, of which less than 21% is labeled as either goodwill or other intangibles. That’s not bad at all. Total liabilities less equity comes to $53.682 billion. Of that, $20.538 billion is in long-term debt. I don’t love that number, but at least none of it rolls over in less than twelve months and at least it hasn’t grown in a year.
Opinion
What a quarter! What an improvement! Profitability is better than nice. Cash flows are soaring. The guidance is outstanding. Betas all around. On top of that, the balance sheet is OK, and debt has stopped growing.
Readers will see here that a head-and-shoulders pattern of bearish reversal early this past winter into spring produced a nasty sell-off that lasted into June. This development created a descending triangle pattern of bearish continuance. What happened on Thursday morning is huge. The stock, now up 10% for the day on a bad day for stocks, broke out of a bearish setup to the upside. When something like that occurs, the breakout is often exaggerated, which we are now seeing.
Moving on to the indicators, both relative strength and the daily MACD are suddenly set up quite bullishly where they had not been only on Wednesday. The stock has taken back its 50-day and 200-day SMAs in one morning. Portfolio managers have no choice today but to increase long-side exposure. This new setup allows for a much higher target price.
Target Price: $652
Pivot: $543 (200-day SMA)
Add: Down to 50-day SMA ($522)
Panic: Loss of 2026 low ($487)
At the time of publication, Guilfoyle was long LMT and RTX equity.
