A year ago, Lockheed Martin (NYSE:LMT) was a defense giant paying for its own mistakes. In the second quarter of 2025 alone, it booked $1.6 billion of reach-forward losses (charges taken when a fixed-price contract is expected to cost more than it pays) across a classified aircraft program and two helicopter programs.
The second quarter of 2026 told a very different story. Sales climbed 11% to $20.1 billion, diluted earnings per share came in at $7.94 versus $1.46, and backlog hit a record $230.4 billion. Management raised its full-year outlook for sales, segment profit, earnings, and free cash flow.
Lockheed builds the F-35 fighter, PAC-3 and THAAD interceptors, Sikorsky helicopters, and Trident ballistic missiles, selling mostly to the US government and its allies under long, multiyear contracts. Yet, despite trading below its own five-year average multiple, the defense giant misses out on a spot among the 10 Best Undervalued Stocks to Buy in October. Whether that gap is a warning or an opening depends on which part of the business actually drives the next few years.
Interceptors Take the Lead
Lockheed’s edge has always been scale and incumbency. Programs like the F-35 and Trident run for decades, and once a weapon is woven into a military’s planning, swapping out its supplier is slow, costly, and rare. The backlog is the proof, growing from $193.6 billion at the end of 2025 to $230.4 billion by the middle of 2026.
The fastest-moving piece sits in Missiles and Fire Control. That segment’s sales rose 19% to $4.1 billion in the second quarter, with PAC-3 and THAAD production ramps adding $560 million, while operating profit climbed 24% to $594 million. The same quarter brought a $35 billion multiyear THAAD contract with the Missile Defense Agency. Interceptor demand is a theme rippling through the broader defense supply chain, prompting Wall Street to weigh Lockheed Martin (LMT) vs. General Dynamics (GD): Which is a Better Stock to Buy? Even though peer contractors like General Dynamics generate similar profit yields and cash flow profiles, Lockheed’s pure-play exposure to soaring missile demand makes its discounted valuation look particularly compelling.
Margins Wake Back Up
The other half of the turnaround is cleaner profitability. Aeronautics swung to a $760 million operating profit from a $98 million loss, and Rotary and Mission Systems moved to $437 million from a $172 million loss. Both swings came mainly because last year’s big charges didn’t recur.
Cash followed the profits. Free cash flow reached $2.9 billion in the quarter, compared with negative $150 million a year earlier, and full-year guidance now calls for $7.0 billion to $7.2 billion. Management also highlighted newer bets, including the Sanctum counter-drone system and an agreement with Rheinmetall to co-produce ATACMS missiles in Europe. That cash generation supports steady value creation, though mega-cap defense primes naturally offer a very different return profile than the mid-cap compounders featured among the 8 Aerospace and Defense Stocks with the Largest 5Y Share Price Returns.
Is the F-35 Losing Altitude?
The bear case starts with the flagship jet. F-35 deliveries fell to 19 in the second quarter from 50 a year earlier, and first-half deliveries dropped to 51 from 97. F-35 sales still rose $475 million on higher production volume, but if you own the stock for the jet, slower handoffs are hard to ignore.
The quarter wasn’t charge-free either. Rotary and Mission Systems took unfavorable adjustments of $65 million on Heavy Lift and $50 million on Seahawk, a reminder that fixed-price risk hasn’t vanished. And Lockheed repurchased no shares in the first half, versus $1.25 billion a year earlier.
Those are real concerns. But the missile and space businesses are growing without needing the F-35 to lead, which makes the jet a drag on the story rather than a break in it.
Cheaper Than Its Own History
At 16.80 times forward earnings, as of October 12, Lockheed trades below both its five-year average of 17.80 and the sector’s 18.83. Put simply, investors are paying less for each dollar of expected profit than they usually have, and less than for the typical peer, even after guidance moved higher.
Growth keeps the discount in perspective. Expected EPS growth of 7.13% in 2027 is steady rather than spectacular, which fits a contractor whose revenue arrives through long multiyear deals. That makes the multiple look reasonable for a high-single-digit grower, not a fire sale.
Where the gap really matters is the earnings base. Last year’s losses left the market with a memory of a company that couldn’t price its contracts, and the second quarter suggests that memory is fading faster than the multiple. That disconnect between rock-solid defense backlogs and depressed multiples is a world away from the speculative plays featured among the 10 Cheap Stocks That Will Go to the Moon According to Reddit. Instead, the trade-off between a $230 billion order book and modest growth is one institutional investors weigh across the entire large-cap defense sector.
Hedge fund interest held steady, with 50 funds holding the stock in the most recent quarter, the same as in the prior one. Short interest sits at 1.42% of the float, pointing to fairly limited bearish positioning.
A Discount Built on Old News
The evidence suggests the discount reflects last year’s charges and the F-35 slowdown more than the business Lockheed showed in the second quarter. With a record backlog, interceptor production ramping, and raised guidance, a multiple below the company’s own average looks hard to defend if margins hold. The setup suits patient investors who want steady, contract-backed growth over fast compounding. Another round of reach-forward losses, or F-35 deliveries staying depressed, would weaken that case quickly.
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