Is Lockheed Martin Stock a Smart Defence Investment Amid Israel-Iran Tensions?

Lockheed Martin (NYSE:LMT) is drawing attention as a defence stock due to its attractive valuation metrics compared to the broader S&P 500. With a price-to-sales ratio of 1.6, significantly below the S&P 500’s 3.0, investors pay less for each pound of revenue. Its price-to-free cash flow ratio of 16.6 also undercuts the S&P 500’s 20.5, and the price-to-earnings ratio of 20.3 offers a notable discount against the market’s 26.4. These figures suggest the market may have already priced in many of Lockheed’s operational challenges, potentially creating an opportunity for investors who believe the negative sentiment is overstated or that improvements are forthcoming.

Lockheed Martin has shown steady, if unspectacular, revenue growth, averaging 3.0% annually over the past three years, trailing the S&P 500’s 5.5%. This reflects the mature defence sector and cyclical government spending. However, recent performance is encouraging, with a 3.1% revenue rise over the last twelve months, from £55 billion to £57 billion, and a 4.5% year-over-year increase to £14 billion in the latest quarter, nearing the S&P 500’s 4.8%. This suggests Lockheed is holding its ground in key defence markets, bolstered by its role as a major missile supplier to the U.S., particularly amid heightened Israel-Iran tensions and missile reallocations to Israel.

Profitability remains a concern, with Lockheed’s operating margin of 10.3% lagging the S&P 500’s 13.2%, generating £5.8 billion in operating income from £57 billion in revenue. Its operating cash flow margin of 9.4% and net income margin of 7.7% also trail the market’s 14.9% and 11.6%, respectively. These pressures likely stem from competitive defence contracting and cost overruns. Financially, Lockheed’s debt-to-equity ratio of 18.2% is manageable, but its low cash-to-assets ratio of 3.2% (versus the S&P 500’s 13.8%) signals limited liquidity. Despite these risks, Lockheed’s resilience in market downturns, such as a milder 20.8% drop during the 2022 inflation shock compared to the S&P 500’s 25.4%, adds a defensive appeal.

Lockheed Martin presents a mixed but intriguing case for investors. Its valuation and defensive qualities are compelling, particularly for value-oriented portfolios that can tolerate volatility. However, weak profitability and liquidity pose risks. The stock’s current pricing appears to reflect these challenges, offering potential upside if operational issues are addressed and defence spending remains robust. We estimate Lockheed’s valuation at £410 per share, suggesting over 10% growth potential from current levels. For those seeking lower risk, diversified portfolios with high-quality stocks may provide a smoother investment journey while still capturing market gains.