Lockheed Martin Stock Has Disappointed Investors. It’s Time to Buy.

Lately, however, Lockheed stock feels like a perpetual laggard. Shares have returned about 9% a year on average over the past five years. Not too bad, but that lags behind the S&P 500 index

SPX

-0.02%

by about six percentage points a year. Not even war in Gaza and Ukraine or tensions between Taiwan and China have been able to boost the laggard stock.

Lockheed has been beset by problems ranging from supply-chain issues, which limited production, to concerns about government military spending. But with order backlogs growing, manufacturing improving, and spending poised to increase, Lockheed’s business is about to get a boost. What’s more, capital returns, including hefty buybacks and a generous dividend, should propel shares even further.

“With supply-chain issues abating, investors likely return to valuing Lockheed with a two- to three-year outlook,” writes Seaport Research Partners analyst Richard Safran. His price target is $551, up about 18% from Wednesday’s close of $465.23.

It’s a bullish take that doesn’t appear to be shared by many. Over the past decade, earnings per share at Lockheed have grown almost threefold while S&P 500 earnings have little more than doubled. All of the outperformance, though, hasn’t led to a better valuation—the stock trades for 17.3 times 12-month forward earnings. That’s a 15% discount to the S&P 500, more than the 10-year average of 5%. Analysts, too, seem to have it in for the stock. Just 32% of those covering Lockheed rate it a Buy or equivalent, well below the 55% average for stocks in the index. It’s as if everyone has gotten stuck waiting for military spending to fall either because of rising budget deficits or a sudden outbreak of peace.

Neither seems to be much of a risk. While any single overseas conflict won’t materially change the trajectory of global military spending, recent flare-ups remind investors that no one is likely to beat his sword into a plowshare anytime soon. Budget deficits have been the more pressing risk. From 2018 to 2023, the U.S. federal government spent about $9.5 trillion more than it took in. That’s the same deficit accumulated from 1997 to 2017. That matters for Lockheed because the U.S. government accounts for 75% of its annual sales, far more than Boeing

BA

0.83%

, for example, which gets less than half of its sales from the feds—a figure that would be even lower if its commercial business were operating normally.

Those concerns seem justified when considering the tepid rate of military spending budgeted for 2025—just a 1% increase. But that doesn’t tell the entire story. Safran argues that investors are overlooking pent-up spending—the difference between what is budgeted and what is actually spent. Because of supply-chain issues and other factors, about $120 billion in previous budgets went unspent and will be added over the next three to four years, Safran says. “Pent-up spending continues to grow, a strong indicator that investors may be underestimating Lockheed’s top-line and free-cash-flow growth,” he writes.

The delays from supply-chain disruptions have also created a large backlog for Lockheed, one that the company should be able to start addressing soon, Chief Financial Officer Jay Malave told Barron’s. “The ability to ramp across the industry…across the supply chain…has been challenged,” he says. “[Budget growth] along with our existing backlog give us confidence we will continue to grow in 2025 and beyond.”

He has a point. Lockheed’s backlog at the end of the first quarter amounted to about $159 billion, more than two years’ worth of sales. Some of that backlog will be shipping soon. Lockheed isn’t delivering the updated version of its F-35 jet fighter yet. Testing has taken longer than expected, but deliveries should begin in the third quarter. Lockheed delivered no F-35s in the first quarter. When things normalize, the company will deliver some 40 jets a quarter to the U.S. and its allies.

That can drive a lot of earnings growth. Currently, Wall Street expects Lockheed to grow earnings per share by about 6% a year on average from 2024 to 2026, while free cash flow over the same period should total almost $19 billion. A lot of that cash will be used to retire stock. Over the past 10 years, Lockheed has spent some $30 billion reducing shares outstanding by almost 25%, with the company buying back $1 billion per quarter in recent years. It also puts out about $780 million in quarterly dividends, giving it a yield of about 2.7%, above the 2.1% average yield of dividend payers in the S&P 500.

The setup was enough for CFRA analyst Stewart Glickman to upgrade shares to Strong Buy from Hold with a price target of $557, up about 20%. His target works out to 20 times estimated 2025 earnings, a small premium to the S&P 500 multiple. That’s not as far-fetched as it might seem. Lockheed stock has traded at a premium to the S&P 500 in the past, and Glickman believes he knows what will get it there again.

“The earliest key catalyst is likely a 2025 appropriations bill by Congress,” he writes of the bill that will determine how much is actually spent on the military in the coming year. “Defense hawks may be able to drive improved spending levels.”

Lockheed Martin stock is poised for takeoff.

Write to Al Root at allen.root@dowjones.com