To The Moon

$Lockheed Martin(LMT)$

Today, we're diving into an analysis of Lockheed Martin stock. Over the past few month, I've follow the stock since it peak, especially since the stock has taken a significant hit. I'll examine that in just a moment.

As always, this is not individual investing advice—just my approach to analyzing stocks. If you have a stock you'd like me to review, drop it in the comments.

Earning Overview

Now, let’s dive into Lockheed. I like to start by looking at the long-term earnings trajectory, which has been solid. Over the past 20 years, earnings have grown at an average rate of nearly 11% per year. That’s pretty strong. Investors who bought two decades ago have likely seen returns of 500–600%, which is quite impressive.

I’ll revisit how the stock performed during recessions later, but for now, let’s zoom in on more recent trends. This decline raises important questions. While forecasting the future is tricky, I’ll lay out some numbers to see what they suggest. Analysts project forward earnings of $27.2 per share. Around this time of year, I start looking ahead to the next 12 months, so that’s something to keep in mind. Defense contractors like Lockheed often have more predictable earnings due to government contracts, but potential U.S. defense budget cuts—possibly around 8%—are a real concern. The new administration appears to be shifting priorities quickly, which has likely contributed to the stock’s decline.

That said, other countries may step up their defense spending if the U.S. reduces its role in global security. While initial earnings could take a hit, international demand might offset some of the losses. Personally, I wouldn’t trade this stock based on news. I own it and have no plans to sell, but I also don’t see it as a strong buy at the moment.

Valuation

Now, let’s look at valuation. I’ll estimate future returns based on trends since 2016. Using my own calculations—which align closely with industry metrics—Lockheed’s earnings growth rate during this period has been around 7.7%. That’s my expectation for the next 10 years. Historically, growth was higher (around 10–11%) due to factors like war-driven spending. If future defense budgets shrink, growth could be lower; if geopolitical tensions rise, it could be higher. But 7.7% seems like a reasonable baseline.

At the end of the day, we just have to make the best assessments we can. I always try to base my analysis on historical data whenever possible, so I’m showing you the time period I’m using for my forecast. It’s up to you to decide whether or not you think that’s a solid approach.

What I want to figure out is this: If I were to buy this business at its current market price, how long would it take for its earnings to pay back my investment? Let’s say I invest $100—how many years of earnings would it take to recover that $100? That’s the key question here.

Growth

Using a 7.7% earnings growth rate, we can start making some projections. Right now, Lockheed’s price-to-earnings (P/E) ratio is around 18, but I prefer looking at the earnings yield, which is just the inverse of the P/E ratio. According to the data, the earnings yield is about 5.41%, and my own calculations put it at 5.36%—pretty much in line with market estimates.

To put this into perspective, if you bought the entire business for $100, it would generate about $5.36 in earnings per year at its current rate—without any growth. However, since we do expect earnings to grow at 7.7% annually, that number should increase over time. In the first year, earnings would rise to about $5.75 per $100 invested, then to $6.22 in the next year, and so on. The key takeaway is that, at this pace, it would take roughly 12 years to fully earn back your investment.

For context, the average payback period for an S&P 500 stock is about 15 years, meaning Lockheed is currently priced slightly below the broader market—assuming these growth projections hold. If the company does earn $27 per share this year and maintains an 8% annual growth rate, then a 12-year payback period is a reasonable estimate.

Personally, I aim for a payback period of around 10 years before I consider buying a stock, especially for a well-established company like Lockheed, where earnings could be in flux over the next few years. Based on that benchmark, Lockheed would need to drop to about $348 per share for me to consider it a buy. That estimate assumes they hit their projected earnings this year, so in reality, the time until payback might be closer to 10–11 years.

Is It A Falling Knife

I actually bought my shares around $323 per share nearly four years ago—time flies! Since then, I haven’t had to pay much attention to the stock, which is a good thing. When you buy at a reasonable price, you can let the investment play out rather than constantly worrying about short-term fluctuations.

If Lockheed were to fall to around $350, I’d start considering it again, but for now, I don’t see it as a strong buy. You won’t find many investors on YouTube who own a stock and still tell you not to buy it—but I do it all the time. If you want better-than-average returns, you have to buy when the market undervalues a stock, not when everyone else is already willing to pay a premium.

I can’t predict exactly where the stock price will go, but I can assess probabilities. Right now, even after a 30% decline, I’m still up 50% on my position—and that’s simply because I bought when it was cheap. Looking at the chart, aside from the 2020 crash, my entry point was one of the lowest in two years.

It’s unlikely the stock will get that cheap again—at least, it’s still not that cheap right now. But if you can buy during a significant dip and lock in a good price, your chances of doing well improve, even when things don’t go smoothly, like they haven’t over the past year.

That said, after this decline, I haven’t outperformed the S&P 500 with this stock. However, a 50% return over four years is still solid, especially for a stock that’s been struggling. That’s the power of a margin of safety—it helps cushion against market fluctuations.

Right now, $348 is the initial level I’d consider, but I’d probably lean toward the 9-year payback timeframe, which suggests a price around $331 per share. That’s just my best estimate based on what we know at this moment, but things are changing quickly, so we’ll have to wait and see.

Recession Lesson and Flashback

Looking at past recessions, particularly the Great Recession, this stock struggled for years. Even in 2012, four years after the 2008 financial crisis, it was still trading at a P/E of 10. Historically, we’ve seen that the market can suppress this stock’s price for extended periods—six years in that case.

That’s why I also consider a more conservative target. If we enter a defense sector recession—perhaps due to government spending cuts—then $256 would be the price level that reflects those conditions. If the stock drops to $350 because of an earnings miss or budget cuts, I’d want to assess whether this is turning into a deeper downturn. If it looks like a more drawn-out recession, then the $256 level would be the better entry point.

I have a separate methodology for calculating that number, but it would take too long to explain in detail. Essentially, it’s based on historical patterns, earnings performance, and what investors were willing to pay in similar past situations. It’s not about trying to pick the absolute bottom but rather preventing premature buying during a decline.

For instance, back in 2008, the stock peaked around $120, dropped to $75, and seemed like a great deal. But it kept falling another 25%, below $60. This method helps avoid buying too soon and instead gets you closer to the bottom. Back then, earnings were steadier, so estimating was easier—whereas now, earnings have been more volatile. Still, using past downturns as a guide, I’d consider stepping in around $256 if the situation worsens.

These different price targets—$350, $300, and $250—represent different levels of margin of safety. Right now, earnings are actually lower than they were in 2020, yet the stock is still trading higher. That tells me there’s room for further downside.

Conclusion

When I bought around $320 in 2020, we were in a broader stock market bubble, though not necessarily for this industry. While everyone else was piling into meme stocks and GameStop, I was focused on undervalued sectors like defense and healthcare. Markets can get irrational in either direction, and I suspect we may only be in the early stages of this selloff.

At $350, it starts getting tempting to ease in, but right now, the stock looks fairly valued—not cheap. It depends on your situation and how much capital you want to put into the market, but personally, I’d wait for a lower price before buying.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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