Lockheed Martin (NYSE:LMT) Q4 2025 Earnings call January 29, 2026 08:30 AM ET Company ParticipantsEvan Scott - CFOJim Taiclet - Chairman, President and CEOMaria Ricciardone - VP of Investor RelationsConference Call ParticipantsDouglas Harned - AnalystGautam Khanna - AnalystGavin Parsons - AnalystKristine Liwag - AnalystMichael Ciarmoli - AnalystMyles Walton - AnalystRich Safran - AnalystRob Stallard - AnalystScott Mikus - AnalystSheila Kahyaoglu - AnalystOperatorGood day, and welcome everyone to the Lockhee ...

Group 1 - Trump's request for a 50% increase in annual defense spending to $1.5 trillion by 2027 represents an unprecedented growth in U.S. military expenditure, with the current fiscal year's national security spending approved at $901 billion [1] - The proposed increase in defense budget is intended to be funded by revenue from tariffs collected last year, which Trump claims will also help pay down national debt and provide tax rebates to middle-income Americans [1] - The U.S. defense spending already exceeds the combined total of the next nine countries, highlighting the significant scale of the proposed budget increase [1] Group 2 - Trump's request requires Congressional approval and follows extensive negotiations with senators, representatives, and other political figures [2] - Prior to the budget proposal, Trump criticized defense contractors for slow production and threatened to ban stock buybacks, cancel dividends, and limit executive compensation, leading to a decline in defense stocks [2] - Following the announcement of the proposed budget increase, defense stocks experienced a significant rebound in after-hours trading, with Lockheed Martin rising 6.4%, Northrop Grumman up 5.7%, Raytheon Technologies increasing by 3.4%, and General Dynamics gaining 4.4% [2]

Core Viewpoint - The article discusses various ETF grid strategies focusing on sectors such as military, gaming, software, and internet, highlighting their growth potential driven by government policies and market trends. Group 1: Military Sector ETF (512710.SH) - The military sector ETF is positioned to benefit from China's defense budget, which is projected to reach 1.81 trillion yuan in 2025, a 7.2% increase year-on-year, marking a historical high. However, this budget still represents less than 1.3% of China's GDP, significantly lower than the U.S. and Russia [3][4]. - The ETF tracks the China Securities Military Leading Index, investing in key military sectors such as aviation equipment, military electronics, missiles, and drones, which are expected to improve due to a new procurement cycle [4][5]. Group 2: Gaming Sector ETF (159869.SZ) - In 2025, a record number of 178 domestic games and 6 imported games were approved, with a total of 1,624 game licenses issued from January to November, surpassing the previous year's total. This normalization of license issuance provides a stable foundation for the gaming industry [6][7]. - Chinese self-developed games generated $9.501 billion in overseas sales in the first half of 2025, reflecting an 11.07% year-on-year growth, indicating strong international market performance [6][7]. Group 3: Software Sector ETF (159852.SZ) - The "14th Five-Year Plan" emphasizes accelerating technological self-reliance and innovation, particularly in software, which is experiencing rapid growth due to government support and the integration of AI technologies [9][10]. - The ETF tracks the China Securities Software Service Index, covering 30 leading companies in the software sector, providing an investment tool to capitalize on long-term growth in software and AI integration [9][10]. Group 4: Internet Sector ETF (513330.SH) - Recent developments in AI products from major internet companies, such as Alibaba and ByteDance, indicate a shift towards more advanced AI applications that enhance user interaction and service capabilities, thereby strengthening their market positions [12][13]. - The ETF is expected to benefit from the increasing integration of AI in core products, which can create new revenue streams and improve monetization capabilities for internet firms [12][13].

Financial Data and Key Metrics Changes - Revenue grew year over year by 28% to $38 million, continuing record performance [3][4] - Net income increased by 54% year over year to $2.8 million, demonstrating effective revenue conversion into profit [4] - Cash and equivalents rose to $7.3 million from $3.6 million at year-end, with shareholders' equity at $25 million, accounting for 66% of the balance sheet [6] Business Line Data and Key Metrics Changes - International revenues grew by 24% year over year, primarily driven by the Indian market [3][4] - The RFID Division faced challenges due to geopolitical tensions and currency fluctuations, but a rebound in demand is anticipated [12][13] Market Data and Key Metrics Changes - The company is strategically expanding overseas, particularly targeting India as a major market for wire and connector assembly [3] - The defense sector's growth is supported by increased global defense budgets and replenishment of Israeli defense forces' inventory [5] Company Strategy and Development Direction - The company aims to enhance organic growth through strategic actions and international expansion, particularly in the defense sector [5] - Plans to open a branch office in India are under consideration to facilitate sales and reduce costs [24][30] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about returning to profitability in the RFID Division due to operational adjustments and improving geopolitical conditions [12][13] - The company anticipates continued growth in the defense segment, with a historical average growth rate of about 7% per year [17][32] Other Important Information - The company has a stable backlog exceeding $24 million and is raising its full-year 2025 financial guidance [4] - The company is exploring M&A opportunities in the Israeli defense sector, targeting profitable companies with complementary products [20][21] Q&A Session Summary Question: Can you highlight new customer opportunities? - The company is focusing on overseas clients, particularly from India, with recent engagements involving a large delegation from India [10][11] Question: When will revenues from new customers impact P&L? - Revenues from international markets have already impacted the P&L, with a 24% increase noted [11] Question: Can you explain the loss in the RFID Division? - The RFID Division faced challenges due to geopolitical issues and currency devaluation, but a rebound is expected [12][13] Question: How has currency impact affected P&L? - The US dollar devalued against the Israeli shekel by about 11%, creating approximately $500,000 in additional cost pressure [14][15] Question: What is the impact of the end of the war in Gaza? - The defense segment is expected to grow despite geopolitical tensions, while the civil market may not benefit from the end of the conflict [16][32] Question: What are the plans for M&A? - The company plans to close an M&A deal within the next year, targeting profitable companies in the defense sector [34][40]

Core Viewpoint - The article discusses various ETFs that are positioned to benefit from specific economic trends and government policies, highlighting their potential for investment returns. Group 1: Saudi ETF (159329.SZ) - Saudi Arabia's "Vision 2030" aims to diversify its economy away from oil dependency, targeting a non-oil GDP export share increase from 16% to at least 50% [3] - The ETF's holdings reflect this diversification, with over 40% in the financial sector and more than 20% in consumer and technology sectors, while traditional fossil fuels account for only about 10% [3] - A proposed amendment by the Saudi Capital Market Authority could allow foreign ownership in listed companies to exceed 50%, potentially attracting more foreign investment [4] Group 2: Bank ETF (512800.SH) - A policy initiative encourages large state-owned insurance companies to increase their investments in A-shares, which may lead to a sustained inflow of long-term capital [6] - The ETF tracks the CSI 800 Bank Index, which had a dividend yield of 4.40% as of September 30, 2025, significantly higher than the market average and the yield on ten-year government bonds [7] Group 3: Military Industry ETF (515660.SH) - China's defense budget for 2025 is set at 1.81 trillion yuan, a 7.2% increase, but still below 1.3% of GDP, compared to 3.5% for the U.S. and 6.3% for Russia [10] - The ETF tracks the CSI Defense Index, focusing on core areas such as aviation equipment, missiles, and new materials, which are expected to benefit from improvements in the defense sector's fundamentals [10]

Summary of Key Points from the Conference Call Industry Overview - The focus is on the **Global Defense** industry, particularly the implications of increased defense spending in Europe and its potential benefits for US defense companies [1][2][3]. Core Insights and Arguments - **European Defense Budget Growth**: Europe is targeting a defense budget increase of approximately **70%**, aiming for over **$800 billion** annually. This represents a significant shift in defense spending priorities, particularly in light of NATO's goal of allocating **5% of GDP** to defense [1][2]. - **US Companies' Exposure**: On average, US defense companies derive about **7%** of their revenue from Europe. Notably, Lockheed Martin (LMT) has the highest exposure at **11%**, followed by L3Harris (LHX) and Northrop Grumman (NOC) at **7%** each [3]. - **Valuation Discrepancy**: US defense stocks are trading at a **50% discount** compared to European counterparts, which are currently valued at **37x N12M P/E**, reflecting a **100% premium** over US defense valuations [1][26]. - **Performance Comparison**: European defense stocks have outperformed US stocks by **80% year-to-date**, with a **135%** increase since the onset of the Ukraine war [23]. Financial Projections - **Incremental EPS Impact**: If US defense sales to Europe increase by **70%**, it could lead to a **5-10%** incremental EPS impact on average for US companies. A more conservative estimate of a **50%** increase aligns with a **3-8%** EPS impact [18][20]. - **Company-Specific Revenue Projections**: - Lockheed Martin (LMT): Projected **2024 Europe Revenue** of **$7.716 billion**, with an incremental EPS of **$2.85** (10.4% of 2025 EPS) [19]. - Northrop Grumman (NOC): Projected **2024 Europe Revenue** of **$2.837 billion**, with an incremental EPS of **$1.69** (6.1% of 2025 EPS) [19]. - General Dynamics (GD): Projected **2024 Europe Revenue** of **$1.924 billion**, with an incremental EPS of **$0.61** (4.1% of 2025 EPS) [19]. Additional Considerations - **Production Capacity Constraints**: Despite the anticipated increase in budgets, production capacity limitations due to past consolidations may hinder the speed at which these budgets translate into revenue growth for US companies [4]. - **Defense Spending Allocation**: Equipment (weapons) constitutes about **30%** of NATO's defense budget, accounting for **65%** of year-over-year budget growth in 2024. The allocation of spending could influence revenue growth rates for US companies depending on whether more funds are directed towards European manufacturers [20]. Conclusion - The anticipated increase in European defense spending presents a significant opportunity for US defense companies, although challenges related to production capacity and market dynamics must be considered. The current valuation disparity between US and European defense stocks may also present a strategic investment opportunity for stakeholders in the defense sector [1][26].