It's 2 Steps Forward, 1 Step Back for Lockheed Martin as Weak Guidance Deletes an Earnings Beat

Core Viewpoint - Lockheed Martin reported a significant earnings beat, but the market's reaction has been tepid, raising questions about the sustainability of its growth and future guidance [2][11]. Financial Performance - Lockheed Martin reported Q1 earnings of $7.28 per share on sales of $18 billion, exceeding Wall Street's expectations of $6.31 per share and $17.8 billion in sales, representing a 15% earnings surprise [2][4]. - Year-over-year sales growth was modest at 4%, while earnings grew by 14% due to improved gross profit margins, which reached nearly 13% [4][5]. - Operating cash flow decreased to $1.4 billion, and free cash flow fell from $1.3 billion in Q1 2024 to $955 million in Q1 2025, indicating a concerning cash generation issue [5][12]. Business Segment Analysis - Sales increased in three of Lockheed Martin's four main business segments, with the missiles and fire control segment showing the strongest performance at $3.4 billion in sales and a 13.8% operating profit margin, up 340 basis points year over year [6]. - The aeronautics segment, responsible for F-16 and F-35 production, experienced the weakest growth at only 3%, with profit margins improving minimally by 30 basis points to 10.2% [7]. Future Guidance - For 2025, management projects revenue between $73.75 billion and $74.75 billion, aligning closely with Wall Street's consensus of $74.27 billion [9]. - Expected earnings for the year are projected to be between $27 and $27.30 per share, slightly below the consensus estimate of $27.22, indicating a potential earnings miss [10][11]. Cash Flow Outlook - Despite the disappointing Q1 free cash flow, Lockheed anticipates a rebound, projecting free cash flow between $6.6 billion and $6.8 billion for the year, which would represent a 26% growth rate [12][13]. - If the company meets its free cash flow target, it would be trading at approximately 16.2 times the current-year free cash flow, which is considered reasonable for a defense stock expected to grow profits at nearly 13% annually [13][14].