Lockheed Martin

Revenue topped $20 billion, up 10.5% compared with the year-ago quarter, while segment margin of 10.8% put Lockheed Martin on pace to outperform management's previous 2026 expectations. Sales accelerated in every segment, driven by ramped up production in a variety of aircraft and missile programs.

Why it matters: Following a slower start in the first quarter of 2026, Lockheed Martin outpaced our second-quarter expectation of revenue by a combined $1 billion and segment profit by $300 million. Ongoing production of F-35 jets and ramping up deliveries of a range of missile and munitions systems are driving results.

The bottom line: We have updated our fair value estimate for the wide-moat defense bellwether's shares to $650 from $640 primarily as a function of the time value of money and slight upward revisions to our 2026 forecast.

Bears say: Lockheed's shares trade around 14% below our revised fair value estimate, having sold off in the months since the onset of the war in Iran. We suspect investors may harbor doubts about whether the company's long-term prospects offer much upside given the breadth of its portfolio and political uncertainty around defense budget funding. We generally see Lockheed Martin, the largest defense prime contractor by an order of magnitude, as having trouble moving the needle in its financial results because it operates such a long list of diverse programs; however, when demand accelerates across the spectrum of its businesses, the results speak for themselves. Management emphasizes that new production contracts to resupply missiles and munitions at multiples of their recent pace will add to the company's backlog when they are signed and funded. We may yet revise our single-digit medium-term growth forecast for the missile segment upward when those contracts and funding come in.

Our fair value estimate is $650 per share, which represents a multiple of our 2026 earnings estimate of 21.5 times and an enterprise value to 2026 estimated EBITDA multiple of 14.4.

We see Lockheed's consolidated revenue continuing to grow at low-single-digit rates in 2026 and beyond as increased defense spending on newer programs flows through to the top line, muted by maturing programs like the F-35. We think that the company's missiles and space segments will offer the most growth in the medium term, over 4% annualized. We think the rotary and mission systems will grow more slowly than the rest of the portfolio because of slowing helicopter demand.

Due to peaking F-35 deliveries (topping out around 160 per year), growing F-35 maintenance revenue, and hypersonic missile development, we see Lockheed's operating margins approaching 12%. We project a midcycle segment margin (which excludes government pension repayments) of 11.4%, 120 basis points above the trailing five-year average. We see some upside in margins for the F-35 over the next few years as more international deliveries enter the business mix—we estimate this program accounts for more than 25% of Lockheed's overall operating profit.

We expect an increasingly effective tax rate for the company from recent lows in the high teens. We forecast the tax rate to normalize roughly 2 percentage points below our assumed 21% statutory corporate tax rate to account for a durable R&D tax credit.

We're anticipating increasing capital expenditures to build out manufacturing capabilities for the firm's munitions, missiles, and other classified businesses. We're expecting the capital expenditure/sales ratio to normalize above the five-year trailing average at 2.6%.

We think a below-average cost of equity of 7.7% and a weighted average cost of capital of 7.4% are justified for this steady business.

We assign Lockheed Martin a Wide Morningstar Economic Moat Rating due to its intangible assets and customer switching costs.

Wide moats are prevalent in the defense industry. We believe significant intangible assets imparted by extreme product complexity thwart new entrants. Switching costs that a risk-averse customer faces emerge from the mission-critical nature of the products, often decadeslong product lifecycles, and prohibitive time and cost to switch suppliers. These dynamics prevail across Lockheed Martin’s business lines. The firm routinely earns returns on invested capital above 20%, versus our 7.4% estimate of its cost of capital, and we forecast it to continue to do so for decades.

We believe incumbent firms are most eligible to service the military’s need to purchase arms (broadly defined). Arms production requires specialized expertise and usually lacks commercial viability outside of defense (aside from commercial aerospace), so new entrants would likely need to develop know-how from the ground up. Only a few capable incumbents are in each major category of defense systems development. The SIPRI arms industry ranking further evinces limited competition: Lockheed Martin, Boeing, BAE Systems, RTX, Northrop Grumman, Airbus, and General Dynamics have remained the top six or seven global arms producers for the past 15 years.

Lockheed Martin makes a wide range of military vehicles, intelligence-gathering and communication systems, radars, sensors, and munitions. Product development ranges from years to decades. If the military is dissatisfied with a product, it is much faster and easier to work with the existing contractor to fix it than to fund an alternative. We view the products with the longest procurement cycles, like fighter jets and missile control systems, as the moatiest because they provide extraordinarily long-term revenue and profit visibility. We view short-cycle products such as defense IT contracting less favorably. Further, the military’s ability to succeed while protecting soldiers’ and civilians’ lives is contingent on these products working as intended, which we think protects proven suppliers from competition.

We view Lockheed's aeronautics segment, dominated by the F-35 program, as having a wide moat; its long program life gives us visibility into future revenue, and the product’s complexity gives us confidence that the incumbent producer will remain active over the long haul. We estimate that the US government’s inventory objective should cover full-rate F-35 production for about 10 years. We expect additional demand from international customers for replacement aircraft and for maintenance, which could last until 2070. We believe that the simple lack of alternatives to the F-35, as well as the mission-critical nature of the product, presents a steep switching cost to the customer. We believe Lockheed Martin will participate heavily in sixth-generation fighters, not only by extending F-22 and F-35 functionality but by building thousands of autonomous companion aircraft to Boeing’s upcoming F-47 and the F/A-XX likely to be built by Northrop Grumman.

We view the rotary and mission systems and the missiles and fire control segments as having wide moats. The moatiest program among them may be the Aegis Combat System, deployed in naval missile defense since the 1980s. Deeply integrated with long-cycle cruisers and destroyers, it is substantially more affordable for the military to upgrade than replace. Lockheed shares the US military helicopter market with Textron and Boeing. We think the massive installed base of its Sikorsky helicopters introduces switching costs to the customer, as it becomes more expensive for the military to maintain many different helicopter types due to some component commonality and training costs. While missiles are expendable and stockpiles must be replenished regularly, we see durable switching costs in their integration in longer-cycle products, such as launchers, ships, and aircraft, not to mention the importance of their operating as intended. Lockheed produces some of the most prolific and longest-serving missile systems, including PAC-3, THAAD, GMLRS, JAGM, and Javelin. The customer tends to order these products in larger blocks, so the contractor must have substantial scale to satisfy customer needs.

We still view the space systems segment as having a wide moat. Although cheap, reusable launch rockets have scrambled some of the math that drove demand for large, long-lived, "exquisite" satellites in high geostationary orbit, the lion’s share of Lockheed's revenue in this segment comes from strategic missile, missile defense, and other services, generally to the Defense Department for secure military communications and surveillance. The space segment also earns billions of dollars from sea-based intercontinental ballistic missiles, hypersonic missiles, and missile defense systems, none of which we expect the likes of SpaceX or Blue Origin to compete for. A small percentage of the space segment's operating profit results from United Launch Alliance activities, with which SpaceX and Blue Origin directly compete.

Risk to Lockheed Martin’s economic moat exists in the possibility, however remote, of a significant lapse or error in its government contracting or production processes causing its exclusion from delivering key defense systems. More broadly, if a malfunction, breach, or vulnerability of one of the company’s systems jeopardized military readiness, security, or capability or caused casualties, it would represent a key product governance failure on the part of the company and could be seen as a breach of the moat if it led to exclusion from a major program family or suspension from federal contracting. No single program other than the F-35 represents more than 10% of our forecast returns, so we see it as diversified enough and remote enough not to model it into our forecast.

Lockheed’s prime contractor role on the F-35, the largest weapon program in history, should deliver stable revenue for decades through procurement and maintenance.

Geopolitical tensions have increased considerably due to the Russia-Ukraine war and escalating conflict in the Middle East. Defense budgets are partially a function of geopolitical conflict, and we expect the US will increase defense spending to deter further conflict.

Defense prime contractors operate in an acyclical business, which could offer some protection if the US enters a recession.

Lockheed depends on US military funding for its sales, which is an inherently political and thus uncertain process.

There is a risk that new competitors like SpaceX or Anduril will threaten incumbents' oligopoly in space contracts or autonomous aircraft.

Lockheed continues to face operational execution risk concerning the F-35 program, which accounts for roughly 30% of sales. While program costs have been managed recently, negotiations with the Defense Department over future lots have dragged on and may imperil funding.