It's 2 Steps Forward, 1 Step Back for Lockheed Martin as Weak Guidance Deletes an Earnings Beat

Lockheed Martin (NYSE: LMT) reported earnings on Tuesday, and the crowd went mild.

Seriously. Rarely has an earnings beat the size of the one Lockheed reported this week been met with such a gigantic collective shrug of dismissal as this one. Heading into earnings day, Wall Street analysts confidently predicted Lockheed would report a $6.31-per-share profit on $17.8 billion in sales. Instead, Lockheed reported $18 billion in sales, and a $7.28-per-share profit, a full 15% better than expected. But two days later, Lockheed Martin stock is still up less than a couple of percentage points.

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And I can't help but wonder why.

Lockheed Martin beat big in Q1 earnings (or did it?)

The most logical culprit for investors' underwhelming response to Lockheed's earnings beat is the fact that its sales didn't grow all that much year over year, rising just 4%. True, earnings grew 14% year over year as its gross profit margin improved markedly (to nearly 13%).

That said, the quality of Lockheed Martin's earnings seems suspect. While generally accepted accounting principles (GAAP) results certainly improved, the cash flow backing up those GAAP earnings didn't -- at all. Operating cash flow for the quarter was actually down year over year at just $1.4 billion, and free cash flow (FCF) declined significantly, from $1.3 billion in Q1 2024 to just $955 million in Q1 2025. Long story short, for every $1 in GAAP profit Lockheed says it earned, the actual cash profit it produced was only $0.56.

That's not a good number. (But read on -- it might get better.)

Going line by line at Lockheed Martin

Sales grew in three of Lockheed Martin's four main business segments, with space being the exception. Profit margins expanded in all four, with the company's missiles and fire control business throwing up the strongest numbers, $3.4 billion in sales at a 13.8% operating profit margin, up an astounding 340 basis points from a year ago.

The company's flagship aeronautics business (responsible for building F-16 fighter jets and F-35 stealth fighters) put up the weakest results. Sales grew a subpar 3% here, with profit margins showing both the smallest improvement year over year (just 30 basis points), and also the weakest absolute results of any division. Lockheed earned only 10.2% margins in aeronautics last quarter.

With aeronautics still Lockheed's biggest business segment, that doesn't bode well for future profits.

Image source: Getty Images.

Lockheed Martin's full-year guidance

Speaking of the future, guidance may be another reason why investors aren't rewarding Lockheed much for its big earnings beat. According to management, 2025 revenue will range from $73.75 billion to $74.75 billion, so basically $74.25 billion at the midpoint, or very close to the $74.27 billion Wall Street consensus.

Earnings for the year, however, will fall short. Management anticipates profits of $27 to $27.30 per share. That makes the midpoint of the range $27.15, or $0.07 short of the consensus estimate of $27.22.

So Lockheed essentially told investors that, despite beating earnings by nearly $1 a share in Q1, it's not going to raise guidance for the full year by $1 a share. To the contrary, Lockheed is probably going to miss earnings later this year. Sure, the miss will be by only a few pennies. But the fact that Lockheed will miss at all has to concern investors.

Is Lockheed Martin stock a sell?

So that's the bad news. The good news is this: While profits may not be all investors hope for this year, free cash flow is looking likely to rebound strongly from Q1's underwhelming performance. Last year, Lockheed generated $5.3 billion in free cash flow, almost exactly equal to its reported net income of $5.3 billion. This year, Lockheed thinks it can generate anywhere from $6.6 billion to $6.8 billion -- much better than you might expect after Q1 FCF fell short of $1 billion.

Taken at the midpoint of $6.7 billion, that works out to free-cash-flow growth of 26%, a superb growth rate, and much stronger than the company's forecast for sales growth (just 4.5%).

Assuming Lockheed hits its free-cash-flow target, furthermore, the stock would be trading at only about 16.2 times current-year FCF. For a defense stock expected to grow profits at nearly 13% annually over the next five years, and paying a respectable 2.8% dividend yield, that's not expensive at all.

In fact, it just might be cheap enough to make Lockheed Martin stock a buy.

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