Lockheed Martin Corporation (NYSE:LMT) has been a disappointing performer this year, returning a mere 4.51% year-to-date as of the close on October 1, versus 11.99% for the S&P 500. The gap further widens over a longer window: just 1.3% against 14.23% over the past 12 months.
What Has Driven The Underperformance
Shares had surged by nearly 40% for the year in early March, but are now down by about 26% from the peak. There are several reasons behind the slide.
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The stock fell sharply after the company reported lower first-quarter earnings that missed estimates due to production slowdowns on some programs and increased costs on fixed-price contracts.
Headlines about a de-escalation in the Middle East have also added to the pressure. Shares are down by over 3% since a Reuters report on September 24 about the U.S. and Iran discussing a deal to reopen the Strait of Hormuz and lifting the economic blockade of Iran.
Fundamentals Are Improving
Following the setback in the first quarter, Lockheed Martin Corporation reported strong results for the second quarter of fiscal 2026. Sales increased 11% from the prior year to $20.1 billion. The uptick was attributed to growth across segments, reflecting the munitions ramp and increase in volume.
Net earnings per share came in at $7.94, compared with $1.46 last year, when the company was hit by a $1.6 billion charge related to difficulties in the Aeronautics unit and helicopter programs, which did not repeat this year.
The defense contractor ended the quarter with a record backlog of $230 billion. This was up 38.3% year-over-year and reflects an increase of $36.8 billion from six months ago. The jump was driven by $65 billion in new orders during the quarter, including a $35 billion multi-year contract for THAAD interceptors.
Given the momentum, Lockheed raised its guidance for both sales and profit for the full year amid growing demand from ongoing geopolitical conflicts.
Sales are now expected between $79.75 billion and $81.75 billion, up from the initial range of $77.5 billion to $80 billion, and above analysts’ average estimates of $79.14 billion. Full-year EPS is anticipated between $29.95 to $30.65 against earlier forecasts of $29.35 to $30.25. This is also higher than Wall Street’s projection of $29.90.
How Lockheed’s Valuation Compares With Peers
The stock trades at a forward price-to-earnings ratio of 16.16. This is below the sector median of 18.97, and also below peers like RTX (24.57). The figure is also below LMT’s own five-year average of 17.79.
The discount appears to stem from investors’ concerns regarding the quality of earnings rather than demand, which remains robust. Repeated charges from fixed-price contracts have made them skeptical about future profits. The EPS jump in Q2 was primarily because last year’s losses did not repeat this time around.
Investors are also looking for better returns for holding LMT until they see an improvement in execution. If that happens, we can expect the valuation gap to narrow.
Case For Buying and Caution
The stock’s low price already reflects the negative sentiment, with the market pricing LMT as a low-growth contractor. With the munitions ramp expected to drive revenue growth ahead, earnings could come in above investors’ expectations, causing an upward re-rating.
That said, some may argue that the discount is deserved. Lockheed Martin Corporation has borne significant charges from fixed-price contracts before, and a repeat could impact the company’s earnings growth story. An end to the Iran war and the timing of the budget could also further shrink the war premium.
A Reasonable Entry For Patient Investors
While LMT is not a screaming bargain, its valuation is already based on a lot of pessimism, limiting the stock’s downside compared to upside. Given the company’s strong business fundamentals, it presents a reasonable entry point for buyers who are willing to brave some volatility. Investors will be keeping a close eye on how the F-35 maker delivers on its Q3 results, which are expected to be reported later this month.
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