How Lockheed Martin Crushed Its Q1 Earnings Report

Lockheed Martin (NYSE: LMT) reported large earnings beats on each the highest and backside strains in its earnings report final week — not that you’d guess it from the inventory value. The corporate beat gross sales predictions by 7.5% and earnings estimates by 10%, but Lockheed inventory ended the week beneath the place it started.

Is that truthful?

Lockheed’s Q1 earnings

For Q1 2024, Lockheed earned $6.39 on gross sales of $17.2 billion. Gross sales elevated almost 14% 12 months over 12 months, however earnings declined a bit — down about 3% 12 months over 12 months. Free money move got here in even decrease than reported earnings. That is the other of what you’d count on to occur, so to an extent it truly was truthful for traders to not bid up Lockheed inventory regardless of the corporate beating expectations.

Why did not Lockheed do even higher in Q1? And why are traders upset with it regardless of the beat?

Unusual as it’s to say since we’re in the course of a worldwide bull marketplace for weapons methods, typically, and for missiles, particularly, however Lockheed’s sole underperforming enterprise in Q1 was its missiles and hearth management division. Out of Lockheed’s 4 principal divisions, every of which loved rising gross sales within the quarter, the missiles enterprise was the one one to indicate declining earnings — down 18%, regardless of gross sales climbing 25%.

The rationale? Lockheed is working exhausting to ramp up manufacturing of just about each form of missile it makes: Guided A number of Launch Rocket Techniques (GMLRS), Excessive Mobility Artillery Rocket Techniques (HIMARS), Joint Air-to-Floor Standoff Missiles (JASSM), Lengthy Vary Anti-Ship Missiles (LRASM), and PAC-3 Patriot and Terminal Excessive Altitude Space Protection (THAAD) interceptors, too. Presumably, it is the exact same manufacturing enlargement that is each enabling larger income progress and entailing prices that depress earnings.

As for the opposite divisions, aeronautics gross sales grew 9%, house 10%, and rotary and mission methods 16%. Earnings grew in every of those three items, with the largest enchancment seen in house (earnings up 16%) and rotary — earnings up 25%. Aeronautics was the outlier, displaying good gross sales progress however little enchancment in earnings, belying hopes that the F-35 fighter jet program would get steadily extra worthwhile because it scales up in dimension.

A brief aspect journey to house

I need to say a couple of phrases on Lockheed’s house enterprise — house being the trade I deal with. Lockheed is the world’s biggest pure-play defense company, so it is no shock that its “house” enterprise is primarily army in nature. The corporate cited larger Fleet Ballistic Missile (FBM) manufacturing, in addition to cash from its just-won $17.7 billion Next Generation Interceptor (NGI) project as contributing to income progress, in addition to $115 million from “nationwide safety” satellites.

Lockheed additionally talked about that it booked $30 million in revenue from its 50-50 possession (alongside Boeing) of United Launch Alliance. After launching simply three rockets in all of 2023, ULA launched as soon as in Q1 2024 and once more at the beginning of Q2 2024. Administration credited this “larger launch quantity” for contributing a bit extra revenue to its backside line.

Extra vital to traders is that, as a result of we all know that (1) ULA launched just one single rocket within the quarter, (2) Lockheed received half the revenue from that launch, and (3) this revenue was $30 million, we will presume that this launch earned a complete revenue of $60 million for ULA.

ULA is a private space company, so it is troublesome to gauge its profitability. However due to Lockheed’s earnings report, we will now put a tentative worth on every launch the corporate conducts — $60 million — and apply that to the charges the federal government pays the corporate for future launches to not less than guess at a revenue margin. And naturally, we will examine that quantity to the revenue margin of Lockheed’s publicly traded house rivals to find out whether or not ULA is successful or shedding the house race.

Now that Lockheed has let this secret slip, let’s be sure that to recollect it.

Is Lockheed Martin inventory a purchase?

As for the remainder of Lockheed Martin, based mostly on final week’s knowledge, we all know the inventory sells for about 17 instances trailing earnings and 1.7 instances trailing gross sales. In line with knowledge offered by S&P Global Market Intelligence, Lockheed Martin averaged solely a couple of 1.2x price-to-sales ratio over the primary 20 years of this twenty first Century — so a 1.7x gross sales ratio appears on the costly aspect, traditionally. Relating to earnings, nonetheless, Lockheed inventory normally trades nearer to a 22 price-to-earnings ratio (P/E) than its present 17 P/E, implying that from a earnings perspective, Lockheed inventory is traditionally low cost.

As a conservative investor, I am inclined to keep away from Lockheed due to its high price-to-sales ratio (P/S). That being stated, if Lockheed can hold its revenue margins as excessive as they at the moment are, I is likely to be persuaded its inventory is definitely a purchase.

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