Lockheed Martin stock drops 9% after massive loss: Is it a buying opportunity?

Lockheed Martin reported $2 billion in losses for 2024 due to higher than expected engineering costs and challenges in two classified programs, with $1.7 billion of that loss occurring in the final quarter, the company announced in its recent earnings results.

The defense contractor faced total year-end losses of $1.4 billion from a classified program within its missiles and fire control (MFC) portfolio, alongside a $555 million overrun in its aeronautics division. Specifically, the MFC program recorded a $1.3 billion charge in the fourth quarter, while the aeronautics program faced a $410 million charge during the same timeframe.

The losses from the MFC program arise from a contract where Lockheed is reimbursed for costs during the initial phase but is then bound by fixed-price terms for follow-on options, which require the company to absorb costs exceeding a specified threshold. Lockheed anticipates that if all options are exercised in the coming years, they will incur losses, with the first charge of approximately $100 million expected in the first quarter of 2024.

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In its release, Lockheed noted, “During the fourth quarter of 2024, the company again assessed the likelihood that additional options may be exercised and now believe it is probable that all options will be exercised based on performance to date, future requirements of the program, discussions with the customer and suppliers, and anticipated customer funding, among other factors, resulting in the recognition of additional losses.”

Initially revealed in April, CEO Jim Taiclet described the MFC program as a long-term franchise expected to yield strong returns after overcoming initial difficulties, while CFO Jay Malave projected the program could become profitable annually around 2028.

Lockheed’s aeronautics program is defined as a fixed-price incentive fee contract that involves complex design and systems integration. The company incurred losses from “higher projected costs in engineering and integration activities necessary to achieve forthcoming milestones,” which it assessed due to approaching deadlines and trends during the fourth quarter.

Malave provided details during the earnings call about process changes aimed at addressing the challenges in the aeronautics program. These changes include ongoing technical milestone monitoring, increasing technical resources in high-risk areas, and introducing new automated testing procedures to expedite issue resolution. He stated, “All those things taken together, give us confidence that we have significantly derisked this program and significantly reduced the risk of future charges on this.”

Lockheed also expressed optimism about collaborating with the Trump administration on streamlining procurement processes and fostering innovation. Taiclet referenced the Department of Government Efficiency (DOGE) led by Elon Musk, highlighting its potential for significant progress in regulatory efficiency and internal operations.

The company is advancing on the F-35’s Technology Refresh 3 (TR-3), which updates the aircraft’s computing systems for future enhancements. Malave noted that while they aim to meet certain milestones within the year, full combat capability might not be achieved as previously intended, possibly extending into 2026. The F-35 production contract with the Pentagon for Lot 18 is expected to be finalized in the first half of the year, with Lot 19 to follow by the end of 2015.

As a result of the classified program losses, Lockheed Martin’s target earnings per share for 2024 is set at $22.31, and it reported $5.3 billion in free cash flow. The company’s net sales increased by 5% to $71 billion and anticipates sales of approximately $73.7 billion to $74.7 billion in 2025, along with a free cash flow target of $6.6 billion to $6.8 billion.

Following these developments, Lockheed Martin’s shares fell 8.9% in the morning session after the earnings report, closing at $457.55, down 9.2% from the previous close. The company failed to meet Wall Street expectations for fourth-quarter revenue and earnings, particularly due to the $1.3 billion loss in its MFC segment.

Lockheed Martin’s stock has declined by 4.9% since the start of the year, trading 25.4% below its 52-week high of $614.61 recorded in October 2024. The stock market typically reacts strongly to such news as significant price decreases could present buying opportunities for investors.

As defense contractors release quarterly updates this week, Lockheed’s earnings miss contrasts with RTX, which exceeded Q4 estimates. General Dynamics and Teradyne are next to announce their earnings, with Northrop Grumman and L3Harris following later this week.

Yes, Lockheed’s long-term growth could reward patient investors.

Lockheed Martin’s 9% stock drop and 25% decline from its 52-week high may offer a discount for long-term investors. Despite a $2 billion loss, the company projects $74.7 billion in 2025 sales and $6.8 billion in free cash flow, signaling strong future fundamentals. If the MFC program turns profitable by 2028, as leadership suggests, early entry could yield significant upside.

Maybe, execution risks and government contracts create uncertainty.

Lockheed expects long-term gains but must manage fixed-price contract risks and execute F-35 TR-3 upgrades without further overruns. The company’s reliance on defense contracts, particularly Pentagon funding and political factors, adds uncertainty. Investors willing to tolerate short-term volatility and wait for margin recovery could find value if management delivers on operational improvements.

No, persistent losses and project delays threaten stability.

Lockheed missed earnings expectations, and its classified program losses could extend beyond 2024, pressuring profit margins. Its stock remains underperforming compared to peers like RTX, and further overruns in aeronautics or MFC programs could lead to additional downward revisions. Investors cautious about fixed-price contract risks and delayed F-35 milestones may prefer to wait.

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Featured image credit: Lockheed Martin