Lockheed Martin's Sky-High Surge: Buy Now or Wait for a Landing?

Key Points

• Lockheed Martin has surged nearly 24% YTD, driven by its digital transformation and escalating geopolitical tensions.
• Despite its impressive rally, LMT's RSI of 82.68 suggests the stock may be overbought and could face a short-term correction.
• Mixed sentiment among analysts and institutions, with a consensus Hold rating and a forecasted 3.2% downside, reflects short-term caution despite solid growth.

Lockheed Martin NYSE: LMT has experienced a significant surge this year, climbing nearly 24% year-to-date and an impressive 20% this quarter alone, despite the broader market's recent pullback. This extraordinary rally has positioned LMT as a standout performer amidst ongoing market turbulence and uncertainty, even considering the market's recent rally, driven by escalating geopolitical tensions and the company's successful digital transformation efforts. 

As a result, investors are left wondering whether now is the right time to gain exposure to LMT or if the stock's rapid ascent has pushed it too far, too soon.

With a current RSI of 82.68, the stock is in overbought territory, suggesting a potential short-term correction is on the horizon. However, LMT's valuation metrics, including a P/E ratio of 20.33 and a forward P/E of 19.8, combined with a dividend yield of 2.2%, still make a compelling case for the stock as a value-oriented investment. 

These factors highlight LMT's ability to outperform the market and provide income, making it an attractive option for long-term investors despite concerns about a possible near-term pullback. However, while it might appear appealing at a glance, let's take a closer look underneath the hood to assess further whether LMT could be a solid addition to an investor's portfolio.

Lockheed's Recent Outperformance and Major Growth

Lockheed Martin's digital transformation is a crucial driver of its growth. It is anchored by its "21st Century Security" initiative, which focuses on integrating cutting-edge technologies across its product lineup. This approach is particularly crucial in the defense sector, where updates to designs and software often face rigorous approval processes. By investing in areas like artificial intelligence and bolstering cybersecurity, Lockheed aims to diversify its growth while enhancing profitability.

The strategy is yielding results. In the most recent quarter, ending June 30, Lockheed reported earnings per share (EPS) of $7.11, an increase from $6.63 in the same period last year. Revenue reached $18.1 billion, up 8.6% year-over-year and nearly $1 billion above expectations. Free cash flow also significantly boosted, doubling to $1.5 billion from $777 million in Q2 2023.

Key contributors to this success include the rotary and mission systems segment, which saw a 17% sales increase driven by critical helicopter, radar, and intelligence control programs. The missiles and fire control division also performed well, with a 13% rise in sales this quarter.

A significant milestone for Lockheed this year has been the resumption of F-35 jet deliveries to the U.S. Department of Defense after a year-long hiatus due to necessary hardware and software upgrades. This production ramp-up is expected to further strengthen the company's core Aeronautics segment as part of its broader digital transformation.

Reflecting this momentum, Lockheed Martin has raised its full-year guidance, now anticipating 2024 EPS between $26.10 and $26.60, up from the previous midpoint estimate of $26. Sales are projected to be between $70.5 billion and $71.5 billion, marking a 6% increase from 2023.

Despite Impressive Growth, Sentiment Remains Mixed

Despite Lockheed Martin's impressive growth and recent outperformance, sentiment among institutions and analysts remains mixed. Based on ratings from 13 analysts, the company maintains a consensus Hold rating, which has been consistent with its stance for over a year. However, in a shift from previous trends, the consensus price target now forecasts a potential downside of 3.2%, marking the first time in over a year that such a decline has been predicted.

Adding to the cautious outlook, insider activity over the past 12 months has shown four instances of stock sales, amounting to $9.3 million, with no insider buying during the same period. Institutional flows also reflect this ambivalence, with total inflows reaching $5.63 billion but being slightly outpaced by outflows of $5.94 billion. This data suggests that while Lockheed Martin continues to deliver strong performance, some stakeholders are exercising caution, possibly due to concerns about the stock's recent rapid ascent.