Buying Lockheed Martin Stock is Better Than Spy Balloons

Wall Street analysts say it may be a good time to invest in Lockheed Martin LMT –0.82% . The reason has nothing to do with balloons. The outlook for growth is improving for the company.

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Despite its urgency, this call has some urgency, too. It's a rare double upgrade, after all.

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Lockheed Martin (ticker: LMT) stock was upgraded by Credit Suisse analyst Scott Deuschle Monday evening from Sell to Buy. He upgraded the stock all the way from Sell to Buy, without stopping at Hold as we are more accustomed to seeing stocks upgraded one level at a time, or downgraded one grade at a time.

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“We upgraded the stock based on our [stronger] sector outlook, an improved belief in Lockheed’s growth inflection, and the possibility of [earnings] estimate upside potential,” according to the analyst in his report.

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Lockheed's operating profit is growing faster than Northrop Grumman's (NOC) which "argues for a relative multiple rerating." Northrop stock trades for about 20 times estimated 2023 earnings, while Lockheed trades for about 17 times.

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There is an expectation by Wall Street that Northrop's operating profit in the coming three years will grow at an average of 11% a year.

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Previously, Deuschle had a sell rating on Lockheed, which he was concerned about due to a weak sales-to-orders ratio. Lockheed has, however, reported higher sales than orders for three consecutive quarters since Deuschle last upgrade the company's rating.

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Premarket trading for Lockheed stock showed an increase of 1.7%. S&P 500 SPX –0.20% futures were up 0.1%, however, the Dow Jones Industrial AverageDJIA –0.28%  futures were down 0.2%. It appears that Deuschle is taking a bullish view on one of the least popular defense stocks out there. There are only 32% of analysts covering Lockheed stock rate the stock as a buy. It is estimated that about 58% of the stocks in the S&P 500 are rated as Buy on average.

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The shares of Northrop stock are rated at a buy by about 40% of analysts covering the stock. In the case of defense contractors Raytheon Technologies (RTX), General Dynamics (GD), and L3Harris Technologies (RTX), the Buy-rating ratios are 63%, 67%, and 54%, respectively.

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One of the reasons we are concerned about Lockheed, in a relative sense, is that its current price/earnings ratio is around 17. There has been a decrease in the share price over the last few years, and shares have traded at a discount to the market of 14 times earnings. As some of Lockheed's fighter jet programs have matured over the past few years, there has been some reason for a discount to be applied: Lockheed's sales have declined over the past few years.

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Sales growth is expected to pick up again by 2025, with sales reaching $71.2 billion, up from $66 billion reported in 2022. There is a consensus estimate of $70.2 billion in sales for 2025 on Wall Street. The shares of Lockheed were down about 4% this year as of Tuesday's trading. Compared to the overall market, they have increased about 28 percentage points in the past 12 months.

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Since U.S. officials spotted a Chinese balloon floating over the U.S. on Jan. 28, shares in the company are up about 2%.