Is Lockheed Martin Stock a Buy?

Last week was a rough one for many investors, with the S&P 500 surrendering 2% through Thursday's close -- but Lockheed Martin (NYSE: LMT) went a different route.

America's biggest defense stock by market cap, Lockheed stock went on offense this week, gaining 10% through Thursday's close after reporting a powerful passel of earnings numbers Tuesday.

Lockheed Martin mops up in Q2

Just how good was Lockheed Martin's quarter? Sales surged 9% year over year to $18.1 billion. Earnings inched 3% higher despite the headwind of $0.26 per share in one-time charges. Best of all for Lockheed and its investors, free cash flow at the defense giant literally doubled, from $771 million a year ago to $1.5 billion in Q2 2024.

So you can understand why investors were so excited.

In a world bedeviled by global conflicts, Lockheed touted its products' ability "to enhance security in Eastern Europe, the Red Sea, and the Middle East," and buyers are responding in droves. According to the company, the backlog of orders awaiting fulfillment currently stands at $160 billion -- enough work to keep Lockheed busy for the next two straight years even if it wins not a single new order in that time.

(Hint: There will be lots of new orders in that time.)

Lockheed by the numbers

Where is Lockheed's growth coming from? Aeronautics, the division responsible for producing F-16 and F-35 fighter jets and the company's biggest revenue driver, saw sales increase only 6% in the quarter, but other divisions did much better. Lockheed's missiles division, for example, boosted revenue 12.5%, while the rotary division (helicopters) grew sales almost 17%!

(The laggard at Lockheed was the space division, which ticked up just 1%).

Still, overall sales growth was good. It didn't translate into similarly good profits growth primarily because of the charge to earnings mentioned above, as well as declining profit margins in aeronautics and rotary. On the other hand, profit margins expanded by 90 basis points in space, and a full percentage point in missiles. At a 14.5% operating profit margin , missiles is now Lockheed's most profitable division.

Make sure to keep an eye on this division. Not only does it produce great numbers, it also produces consumable products that Lockheed can build, sell, and then restock over and over again. That's less true with segments focusing on durable assets like jet fighters, helicopters, and spacecraft.

Is Lockheed stock a buy?

Encouraged by its latest results, Lockheed Martin raised guidance through the end of this year, predicting that 2024 will see sales reach at least $70.5 billion (a goal above the high end of its previous forecast), and potentially as high as $71.5 billion. Lockheed also boosted its projections for operating profit and bottom-line earnings, predicting it will earn between $26.10 and $26.60 per share this year.

That yields a current-year price-to-earnings (P/E) ratio of about 20 on the stock, which doesn't sound bad. Then again, 20x earnings divided by even the stock's 9% sales growth rate (assuming constant profit margins) would work out to a PEG ratio of more than 2 on Lockheed stock, which is far from cheap.

Of even greater concern is the fact that few stock market analysts think the good times will last forever for Lockheed. According to S&P Global Market Intelligence , in fact, most analysts agree Lockheed's earnings will increase by less than 3% annually over the next five years -- which coincidentally was exactly the earnings growth Lockheed achieved in Q2 -- so we could be near the high-water mark for this stock's price right now.

Personally, while I'm as impressed by the company's Q2 results as any of the other investors who bought into Lockheed this week, I must admit that the stock's valuation gives me pause. This may put me in the minority right now, but I do not consider Lockheed Martin stock a buy.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy .