Why Lockheed Martin Stock Dropped Tuesday Morning

Lockheed Martin (NYSE: LMT) stock initially fell more than 4% in Tuesday morning trading before paring its losses in the afternoon. As of 8 2:35 p.m. ET, Lockheed stock is still down -- but now only 0.8%.

But why did Lockheed Martin fall at all?

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Lockheed's big price rollback

The most obvious catalyst for Lockheed Martin's morning sell-off was Lockheed's announcement yesterday of a new PAC-3 Adapted Capability Effector (PAC-3 ACE) Patriot missile that will either replace or supplement Lockheed's existing product, the PAC-3 MSE (for "Missile Segment Enhancement").

That sounds like good news -- more missiles for Lockheed to sell, especially if the ACE supplements existing sales of MSE Patriots. But here's the thing:

Lockheed is marketing ACE as a "low-cost" interceptor missile. But when Lockheed says "low-cost," investors seem to have heard ACE will be "low-profit," endangering the 13% operating profit margin at Lockheed Martin Missiles and Fire Control.

We'll make it up on volume

I think that's the wrong way to look at this news, however -- with Lockheed's stock price losses moderating as the day goes on, my hunch is other investors are coming to the same conclusion.

Why? Just because Lockheed advertises a product as "low-cost" doesn't mean the cost will be objectively low -- nor that profit margins will be low. PAC-3 MSE historically cost about $4 million per missile, although it's gotten more expensive due to increased demand in Ukraine and the Persian Gulf. ACE, at a reported $2.5 million price, may cost half as much as an MSE today -- but it's a much smaller discount relative to MSE's historical price.

Factor in lower input costs, plus more sales of cheaper ACEs, and I suspect Lockheed Martin stock is going to do just fine.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.