On August 3, the Pentagon inked a more than $3 billion deal with Lockheed Martin Corporation (NYSE:LMT) and Northrop Grumman Corporation (NYSE:NOC) to boost the production of Patriot and THAAD interceptor missile parts.
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The development comes as the conflict in Iran intensifies and the Ukraine war rages on, straining stockpiles. The Centre for Strategic and International Studies recently estimated that the U.S. military was left with less than 1,000 Patriot interceptors and under 250 THAAD interceptors on hand.
Deal Breakdown
The deal includes a $2 billion framework agreement to accelerate the production of PAC-3 MSE by providing critical components and a $1 billion agreement to expand the monthly supply of THAAD components over seven years, Northrop said in a press release. The contract type was not disclosed.
The development establishes the defense contractor as the second source supplier of solid rocket motors for the PAC-3 MSE.
According to the Pentagon’s press release, the framework aims at tripling the production of Patriots and quadrupling THAAD output.
This follows last week’s announcement of a $58.6 billion contract for Lockheed Martin Corporation (NYSE:LMT) to produce Patriot interceptor missiles.
Bull Case
Lockheed Martin
The agreement has reinforced the PAC-3 interceptor’s status as a significant pillar of multi-year growth for Lockheed Martin Corporation (NYSE:LMT). It also adds fresh visibility into the defense contractor’s backlog, which reached a record $230 billion at the end of the second quarter.
Moreover, having a new second source of solid rocket motors will help in easing the delivery bottleneck for the company as it targets the planned output expansion.
Northrop Grumman
For Northrop Grumman Corporation (NYSE:NOC), the PAC-3 agreement provides a new revenue stream, which can act as a growth driver amid investor concerns regarding core program margins.
On the other hand, the THAAD contract builds on an established role, considering that Northrop has been providing the missile defense system with critical expertise related to aft bulkheads, interceptor shell cores, and heat shield assemblies since 2002.
Bear Case
Lockheed Martin
Lockheed Martin Corporation (NYSE:LMT) remains the primary defense contractor for the PAC-3. It could face schedule risk if Northrop faces ramp-up delays. This is a new dependency that did not exist before.
Furthermore, the demand is a reaction to depleting stockpiles, instead of being driven by a growing addressable market. This raises questions about the durability of growth, as a de-escalation in either Ukraine or the Middle East could result in reduced urgency to procure these weapons.
Northrop Grumman
Northrop’s core issue remains its operational performance. Strong demand is not leading to improved margins. Operating income in two of the company’s four business units declined year-over-year during Q2, while analysts noted that the quarterly earnings beat was substantially driven by a lower tax rate.
Moreover, the aerospace and defense contractor is already facing cost pressures in programs such as the GEM 63XL and SiAW.
Hedge Fund Ownership Trends
While we await 13F filings data for the second quarter, institutional investors significantly increased their stake in Lockheed Martin Corporation (NYSE:LMT) during Q1, with hedge fund ownership expanding 41% sequentially, from 59 funds to 83 funds, driven by rising defense spending globally.
AQR Capital Management held the largest stake in the company worth over $911 million, followed by Two Sigma Advisors and D E Shaw with holdings of $815 million and $584 million, respectively.
On the other hand, 62 hedge funds held positions in Northrop Grumman Corporation (NYSE:NOC), remaining unchanged from Q4 2025, reflecting a less aggressive and steady accumulation from investors.
The same three hedge funds topped NOC’s holder list, but at a smaller scale, with investments valued at approximately $227 million, $216 million, and $142 million, respectively, at the end of Q1.
Valuation and Closing Take
Lockheed Martin Corporation (NYSE:LMT) and Northrop Grumman Corporation (NYSE:NOC) trade at forward price-earnings ratios of 19.14 and 19.57, respectively, well below the sector median of 21.19, suggesting that both stocks are likely undervalued.
Comparing the two, LMT appears to be the steadier compounder, given the strong recent quarterly results, hedge fund ownership growth, and a record backlog. NOC, on the other hand, is a higher-variance bet considering the margin pressures it is facing and the potential for upside from new programs.
That said, both LMT and NOC are tied to the same assumption that the war in the Middle East and Ukraine will keep demand for weapons elevated for the coming years, and not just quarters. A flip could adversely impact both stocks together.
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