LMT Analysis: Lockheed Martin Touches a 52-Week High as Global Rearmament Reshapes the Defense Sector — Is the Rally Priced In?

Lockheed Martin currently trades at 30.7x trailing earnings — well above its five-year average of roughly 16-18x and a significant premium for a defense contractor with single-digit revenue growth. The price-to-book ratio of 16.6x reflects the company's capital-light return profile, though it also highlights the thin equity base ($6.7 billion in shareholders' equity against $59.8 billion in total assets).

The enterprise value stands at approximately $129.3 billion, putting EV/EBITDA at a lofty 56.6x on a trailing basis — though this is somewhat inflated by Q2 2025's anomalously weak EBITDA. Normalizing for the Q2 charge, the metric sits closer to 14-15x on a full-year basis, which is more in line with defense sector peers. Free cash flow yield at the current price is 4.5% ($6.9 billion FCF on a $152.3 billion market cap), which provides reasonable support for the dividend and buyback program but leaves little margin of safety at these levels.

The Graham Number — a conservative estimate of fair value based on earnings and book value — sits at just $61.74, suggesting the stock is deeply overvalued by classic value metrics. However, defense stocks have historically traded at premiums during periods of elevated geopolitical risk, and the current environment arguably justifies some expansion. The question is how much.

Lockheed delivered full-year 2025 revenue of $75.1 billion across its four segments: Aeronautics (led by F-35), Missiles and Fire Control, Rotary and Mission Systems, and Space. The quarterly trajectory tells an interesting story.

Q1 2025 was the strongest quarter with EPS of $7.28 on revenue of $18.0 billion and an operating margin of 13.2%. Q3 delivered solid results with EPS of $6.95 on $18.6 billion in revenue and a 12.3% operating margin. Q4 finished the year with $20.3 billion in revenue — the highest quarterly top line — though EPS of $5.80 was weighed down by higher other expenses.

The outlier was Q2 2025, where EPS collapsed to $1.46 on an operating margin of just 4.1%. The quarter included what appears to be a significant program-related charge that compressed gross margins to 4.0% — far below the company's typical 11-13% range. Excluding this anomaly, the underlying earnings power of the business remains intact.

Full-year net income of $5.0 billion compares to $5.3 billion in FY2024 and $6.9 billion in FY2023, reflecting the Q2 drag. On a normalized basis, Lockheed's earnings power appears to be in the $26-28 per share range, which would put the forward P/E closer to 24-25x — still elevated, but more defensible given the backlog environment.

Lockheed Martin's balance sheet reflects the aggressive capital return philosophy that has defined its strategy for over a decade. Total debt stands at $21.7 billion against shareholders' equity of just $6.7 billion, producing a debt-to-equity ratio of 3.2x. This is high by industrial standards but typical for defense primes, which operate on government-backed contracts with predictable cash flows.

The company's interest coverage ratio of 8.0x provides comfortable headroom, and the current ratio of 1.09x — while thin — is sufficient given the nature of defense contracts where milestone payments provide built-in working capital management. Cash on hand of $4.1 billion at year-end was notably higher than the $2.5 billion at the end of FY2024, reflecting strong Q3 and Q4 cash generation.

Free cash flow of $6.9 billion in FY2025 was the story within the story. Operating cash flow of $8.6 billion less capital expenditures of $1.6 billion funded total shareholder returns of $6.1 billion ($3.1 billion in dividends plus $3.0 billion in buybacks). The payout ratio of 59% on dividends alone suggests the distribution is well-covered, though the combined payout ratio of 122% (dividends + buybacks / net income) shows the company is returning more than it earns — a sustainable strategy only as long as FCF remains robust.

Tangible book value is deeply negative at -$28.06 per share, driven by $13.2 billion in goodwill and intangible assets from acquisitions (notably the 2015 Sikorsky deal). This is a structural feature of defense companies that have consolidated through M&A and should not be confused with financial distress — Lockheed's government-backed revenue stream is among the most predictable in any industry.

Lockheed Martin's competitive position is defined by barriers to entry that are essentially insurmountable. The F-35 Lightning II program, with over 1,000 aircraft delivered to 19 nations, generates decades of aftermarket revenue through maintenance, upgrades, and spare parts. Each F-35 sold creates an annuity stream that extends 30+ years into the future.

The most significant near-term catalyst is European rearmament. Germany's potential decision to double its F-35 order from 35 to 70 aircraft would represent approximately $8-10 billion in additional revenue. While Germany has officially denied the report, the broader trend is unmistakable: NATO nations are racing to meet defense spending targets, and Lockheed's products sit at the top of most shopping lists. The F-35 is the only fifth-generation stealth fighter available to allied nations.

Beyond the F-35, Lockheed's Missiles and Fire Control segment has benefited from the replenishment cycle driven by Western nations backfilling stockpiles depleted by aid to Ukraine. The Javelin anti-tank missile, HIMARS rocket system, and PAC-3 missile interceptor are all seeing elevated demand with multi-year order backlogs.

The U.S. defense environment adds another layer. Reports of the Pentagon ramping Middle East air assets to 2003 levels underscore sustained demand for Lockheed's platforms across the fighter jet, missile defense, and space segments. With the FY2026 U.S. defense budget projected above $900 billion, the funding environment has rarely been more favorable.

The key risk to the growth thesis is program execution. The Q2 2025 margin compression serves as a reminder that fixed-price development contracts can produce painful surprises. The F-35's unit cost has been declining, but sustainment costs remain a political vulnerability that could invite Congressional scrutiny.

Analyst estimates point to continued revenue growth, with FY2028 quarterly estimates averaging $21.7 billion per quarter — implying annual revenue approaching $87 billion, representing roughly 16% growth from FY2025's $75.1 billion over three years.

EPS estimates for FY2028 average approximately $35.31 annually (aggregating quarterly estimates of $7.97, $8.49, $8.81, and $10.03), suggesting mid-single-digit annual earnings growth from normalized 2025 levels. At the current price of $658.26, this implies a forward P/E of roughly 18.6x on 2028 estimates — a more reasonable valuation that partially explains why the stock has run so hard.

The dividend, currently yielding 2.7% with a quarterly payout of approximately $3.30 per share, has been increased for 23 consecutive years. With a payout ratio near 59% and growing free cash flow, the streak appears safe. Lockheed is not a dividend aristocrat yet (requires 25 years), but it's knocking on the door.

Catalysts to watch include: the next German F-35 order decision, which could add billions to the backlog; the FY2026 U.S. defense budget appropriation; any escalation in Middle East tensions that accelerates procurement timelines; and the upcoming Q1 2026 earnings report on April 21, which will set the tone for the year.

Risks center on budget sequestration (unlikely but not impossible under a deficit-focused Congress), F-35 sustainment cost controversies, and the possibility that the stock has already priced in the European rearmament theme. A significant de-escalation in any major theater could remove the geopolitical premium that has driven the multiple expansion.

The global defense spending environment is the most favorable for contractors like Lockheed Martin since the post-9/11 buildup. NATO's 2% GDP spending target, once aspirational for most European members, has become a floor rather than a ceiling. Poland is spending 4.7% of GDP on defense, Germany has created a €100 billion special fund, and the United Kingdom recently committed to reaching 2.5% by 2027.

This structural shift matters because Lockheed's international sales have historically lagged its U.S. government revenue. The F-35 program is the primary vehicle for international growth, and the addressable market is expanding as more nations seek fifth-generation capabilities. Japan, South Korea, Singapore, and potentially additional European buyers represent a pipeline that could sustain F-35 production well into the 2030s.

The competitive landscape is also favorable. Boeing's defense unit has struggled with fixed-price contract losses and program delays. Northrop Grumman is focused on the B-21 bomber and missile defense. RTX (Raytheon) competes in missiles and engines but not fighter aircraft. Lockheed's position as the sole F-35 prime contractor is a moat that cannot be replicated — the program's decades-long development timeline and trillion-dollar lifetime cost make it irreplaceable.

The risk that AI or autonomous systems could disrupt traditional manned fighter programs is real but distant. Lockheed itself is investing in autonomous wingman concepts (the Loyal Wingman and NGAD programs) to ensure it remains relevant in the next generation of air combat.