On September 14, the Department of War (DoW) awarded Lockheed Martin Corporation (NYSE:LMT) three defense contracts totaling over $1.3 billion.
The largest was a $1.21 billion award for the Precision Strike Missile (PrSM) Increment 2 Early Operational Capability. This is a cost-plus-fixed-fee, firm-fixed-price, IDIQ contract, which is anticipated for completion by September 13, 2031. According to DoW, funding and work locations will be finalized with each order.
The company also received a $97.64 million contract for the Multiple Launch Rocket System recapitalization. Work on the program will be executed in Camden, Arkansas, and Grand Prairie and New Boston in Texas. The award has a completion date of September 4, 2031.
Lastly, the defense contractor’s Missile and Fire Control division secured a $13.17 million modification to an existing contract for Joint Air-to-Surface Standoff Missile (JASSM) to aid in increased Long Range Anti-Ship Missile (LRASM) production. Work on the contract will be performed in Orlando, Florida, and is anticipated to be completed by November 29, 2028.
Bull Case
All three contracts are tied firmly to the company’s munitions production pipeline. Sales at the Missiles and Fire Control business expanded nearly 20% year-over-year in Q2 and primarily led results in the beat-and-raise quarter.
These orders highlight that the munitions ramp behind the upbeat outlook is continuing to materialize in real contracts, and is not mere rhetoric.
The PrSM contract is sole-bid, which implies limited competitive pressure on Lockheed Martin Corporation regarding pricing for the program. The contract has an estimated completion in 2031, providing multi-year revenue visibility.
The JASSM/LRASM contract modification also includes a Foreign Military Sales component. While the name of the country has not been revealed, this points to potential future export demand beyond domestic defense spending.
Bear Case
The PrSM contract is cost-plus-fixed-fee. This will place a cap on the defense contractor’s profit margin, irrespective of the size of the order, and overstate the earnings benefit.
Only one bid was solicited and received on the PrSM contract. This is often the case with high-end missile and defense programs, which are dominated by a few companies because of their engineering prowess, production infrastructure, and security clearance. This pattern has at times attracted concern from Congress and watchdog groups.
Investors evaluating contract quality may also perceive such a contract to have been awarded at a premium, which the government would not have under competitive bidding.
Skeptics also argue that given Lockheed Martin Corporation’s overall size, a $1.3 billion order from three contracts is modest at best. The MLRS and JASSM/LRASM awards are just $97.64 million and $13.17 million, which are unlikely to have any significant impact on quarterly results ahead.
Hedge Fund Ownership Trends
According to Insider Monkey, 75 hedge funds held a stake in the company at the end of the second quarter, declining from 83 funds in Q1.
AQR Capital Management cut its position by 23%, yet remained the largest stakeholder with shares worth $701 million as of June 30. Citadel Investment Group was second with holdings of $342 million, while Holocene Advisors had the third-biggest stake valued at nearly $291 million.
Closing Take
The announcement by the DoW is a positive development for Lockheed Martin Corporation but not a decisive data point. The three awards reaffirm the momentum in the company’s munition programs, but also contain structural clauses that may limit the bullish thesis surrounding the news. The contracts should be viewed as a continuation of an existing trend, rather than an independent catalyst.
That said, the company’s fundamentals remain strong, and its valuation offers an attractive entry point for long-term value. The stock trades at a forward price-to-earnings ratio of 17.36 as of September 15, which is well below the sector median of 19.50 and other peers such as RTX, GD, and NOC.
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