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

Source The Motley Fool

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.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

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.

F-16s in flight.

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.

Should you invest $1,000 in Lockheed Martin right now?

Before you buy stock in Lockheed Martin, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Lockheed Martin wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $591,533!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $652,319!*

Now, it’s worth noting Stock Advisor’s total average return is 859% — a market-crushing outperformance compared to 158% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of April 21, 2025

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

Disclaimer: For information purposes only. Past performance is not indicative of future results.
placeholder
Gold price hits two-week high as USD declines on deteriorating US fiscal outlookGold price (XAU/USD) prolongs the uptrend for the fourth consecutive day and climbs to a nearly two-week high, around the $3,344-3,345 area during the Asian session on Thursday.
Author  FXStreet
8 hours ago
Gold price (XAU/USD) prolongs the uptrend for the fourth consecutive day and climbs to a nearly two-week high, around the $3,344-3,345 area during the Asian session on Thursday.
placeholder
Shiba Inu’s Shibarium Struggles As New Accounts Crash To Fresh LowsFollowing its launch by the Shiba Inu team back in August 2023, the Shibarium network has been subject to the highs and lows of the market.
Author  NewsBTC
9 hours ago
Following its launch by the Shiba Inu team back in August 2023, the Shibarium network has been subject to the highs and lows of the market.
placeholder
GBP/USD falls to near 1.3400 following mixed UK PMI dataGBP/USD is depreciating after the mixed S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) data was released on Thursday. The pair has maintained its position near 1.3468, the highest since February 2022, reached on Wednesday, and is trading around 1.3410 during the European hours.
Author  FXStreet
9 hours ago
GBP/USD is depreciating after the mixed S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) data was released on Thursday. The pair has maintained its position near 1.3468, the highest since February 2022, reached on Wednesday, and is trading around 1.3410 during the European hours.
placeholder
EUR/USD briefly dips as Eurozone PMIs unexpectedly declineEUR/USD faces selling pressure and falls to near 1.1310 during European trading hours on Thursday. The major currency pair drops as the Euro (EUR) underperforms after the release of the surprisingly weak preliminary Eurozone HCOB Purchasing Managers’ Index (PMI) data for May.
Author  FXStreet
10 hours ago
EUR/USD faces selling pressure and falls to near 1.1310 during European trading hours on Thursday. The major currency pair drops as the Euro (EUR) underperforms after the release of the surprisingly weak preliminary Eurozone HCOB Purchasing Managers’ Index (PMI) data for May.
placeholder
AUD/JPY falls below 92.50, further downside appears due to rising odds of BoJ rate hikesAUD/JPY hits a fresh two-week low, with trading around 92.30 during the European hours on Thursday.
Author  FXStreet
10 hours ago
AUD/JPY hits a fresh two-week low, with trading around 92.30 during the European hours on Thursday.
goTop
quote