Lockheed Martin Shares Are Up 21% This Year. Can the Rally Continue?

Shares Lockheed Martin (LMT -0.01%) managed to sustain a big rally this year through the latest round of extreme market volatility. The stock is up about 21% in 2024, holding near an all-time high even as S&P500 has fallen more than 7% from the peak reached in recent weeks.

That momentum is great news for investors, suggesting the stock remains well-supported by strong fundamentals and a positive outlook. In this case, the defense behemoth is using the boom in demand from ongoing geopolitical conflicts as a tailwind for profits.

Could Lockheed Martin be a good addition to your portfolio? Here’s what you need to know.

Digital transformation to drive growth

An important theme for Lockheed Martin is its ongoing “21st Century Security” initiative, which aims to accelerate the integration of more advanced technologies across its product portfolio.

The move is significant because military programs typically face a complex approval process for design updates and new software solutions. The effort includes investments in artificial intelligence while also strengthening cybersecurity capabilities, both key growth drivers. The goal is to deliver more diversified growth with increased profitability.

The strategy appears to be paying off. Lockheed recently reported second-quarter results (for the period ended June 30) with earnings per share (EPS) of $6.85, up from $6.63 in the year-ago quarter. Revenue of $18.1 billion was up 9% year over year and nearly $1 billion ahead of the average Wall Street estimate. The move in free cash flow was even more impressive, coming in at $1.5 billion, nearly double the $777 million in Q2 2023.

Management points to the momentum in the Rotary and Mission Systems segment, where second-quarter sales were up 17% year-over-year. This group includes more than 1,000 programs spanning helicopters, radars and intelligence control, which has proven critical in the active theaters of operations in Eastern Europe and the Middle East. The Missiles and Fire Control business was also strong, with sales up 13% in the quarter.

Perhaps the biggest news for Lockheed Martin this year is the resumption of deliveries of F-35 aircraft to the U.S. Department of Defense, which have been on hold for the past year due to hardware and software upgrades. The ramp-up in production as part of the company’s digital transformation strategy is expected to boost growth prospects for the core aviation segment.

As for the outlook, the trends were good enough for the company to raise its full-year estimates. Lockheed Martin now expects 2024 earnings per share in a range of $26.10 to $26.60, up from the previous $26 average estimate for sales in a range of $70.5 billion to $71.5 billion, an increase of about 6% compared with 2023.

Defense Sector Leader with Attractive Valuation

Lockheed Martin’s attractiveness as an investment opportunity stems from its leadership position in the sector, a market area that has gained importance in recent years, from the Russia-Ukraine conflict in 2022 to the recent situation in the Red Sea.

We can all hope for a quick and peaceful resolution, but the reality is that national security is big business. Lockheed Martin is well-positioned to take on growing defense budgets from allied forces around the world.

I believe the stock is still a good value compared to its peers at 21x 2024 estimated earnings per share RTX, Northrop GrummanAND General dynamicswhose price is close to the average profit premium.

The key here is that Lockheed Martin’s position in high-profile programs like the F-35 fighter jet and the Sikorsky UH-60 Black Hawk helicopter could justify an even higher premium. Ultimately, the company’s ability to boost margins as it becomes more technologically advanced should allow the stock to trade at a valuation spread above its peers over time.

LMT P/E (Forward) data by YCharts

Lockheed Martin stock decision

There are many reasons to like Lockheed Martin, which has a long history of generating positive returns for shareholders. The combination of a stable growth outlook with overall solid fundamentals supports a buy rating in my view.

Investors interested in stocks could consider adding positions to a diversified portfolio. I like the dollar-cost averaging strategy, buying stocks over time to help smooth out short-term volatility.

Dan Victor has no position in any stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.