It’s pretty easy to detail the bull case for defense contractor Lockheed Martin (NYSE:LMT) at the moment. The LMT stock price has dropped 6% just since the beginning of the month — a reasonably big move for a stock with minimal volatility. The Trump Administration clearly is looking to increase defense spending and expand sales overseas. And Lockheed Martin stock looks cheap, at 17x forward earnings.
Meanwhile, there are catalysts on the way. Revenue from the F-35 program continues to increase. The potential “Space Force” offers another mid- to long-term driver. And as InvestorPlace’s Will Ashworth pointed out in July while correctly recommending Lockheed Martin stock, buying the dip here almost always makes sense.
Q3 earnings on Tuesday morning may remind investors of the bull case here — and allow the LMT stock price to rebound. Indeed, as strong as the bull case here looks, the only concern is that it might look a little too good.
Lockheed Martin Stock Ahead of Earnings
The LMT stock price generally doesn’t move all that much around earnings, but Tuesday’s report could be different. LMT stock has been caught in the market’s downdraft of late — for no real reason. The outlook for defense spending hasn’t changed. The company did cut the price on an order of F-35’s, but reports also suggest significant progress toward what would be a $37 billion program.
Meanwhile, Lockheed Martin has posted three straight beats on both the top and bottom lines — and handily so. The stock closed higher out of the Q2 release in July, and would eventually run to a five-month high before pulling back as the calendar turned to October.
Meanwhile, Q3 projections from Wall Street don’t seem that aggressive. Consensus calls for 7.4% revenue growth — modestly higher than the 6.7% increase Lockheed posted in the second quarter. EPS is expected to rise sharply — $4.31 vs $3.24, or 33% — but last year’s quarter was a bit soft and Lockheed will benefit from tax reform.
So there’s a path here to nice upside. Solid earnings remind investors of the quality story — while the LMT stock price has pulled back. Investors buy the dip, as they have in the past, and Lockheed Martin stock moves higher.
Is the LMT Stock Price Headed Further South?
In fact, the only thing that would worry me about Lockheed Martin stock is that the story might be too good. It’s not as if investors are unaware of the Trump Administration’s attitude toward defense spending, or the growth in overseas orders. Yet LMT has sold off of late and traded sideways in 2018.
And while the LMT stock price has pulled back, so too have peers — and even further. Boeing (NYSE:BA) has dropped almost 10% in a couple of weeks. Raytheon (NYSE:RTN) and General Dynamics (NYSE:GD) each have lost 9% from this month’s highs. The latter two stocks, on a price-to-earnings basis, remain cheaper than LMT. Both trade 17% below 52-week highs. Investors who “buy the dip” may do so in RTN or GD — not Lockheed Martin stock.
That said, LMT likely deserves a premium to RTN and GD. And 17x earnings sits squarely within the stock’s long-term range. Given that Lockheed Martin stock has returned double digits annually for almost a quarter century now, buying LMT at this valuation likely drives above-market gains. A few investors have forgotten that over the past few sessions. Tuesday’s report may remind them.
As of this writing, Vince Martin has no positions in any securities mentioned.