Barron’s recently highlighted the positive outlook for Lockheed Martin stock, dispelling common fears that military spending has peaked or is near its peak. To understand why Lockheed Martin remains a solid investment, it’s essential to delve into some key numbers and trends in defense spending.
Understanding Defense Spending: A Global Perspective
Before predicting future spending trends, it’s crucial to know who spends what on defense. According to data aggregated by Bloomberg, the U.S. spent just over 900 billion on defense in 2023. This amount represents about 38% of the world’s total defense expenditure, significantly more than the 296 billion spent by China in the same year. Interestingly, the U.S. percentage of global defense spending has declined from almost half at the end of the Cold War.
- U.S. Defense Spending: Over $900 billion in 2023
- China’s Defense Spending: $296 billion in 2023
- Global Share: U.S. accounts for 38% of global defense spending
The U.S. defense budget has been growing at approximately 6% per year over the past five years, which is in line with global trends (excluding China, which has seen a 5% annual increase). Global defense spending has reached an all-time high, with growth accelerating since 2016. This rapid growth often raises concerns among defense investors about the sustainability of such high spending levels.
Lockheed Martin’s Valuation and Market Position
Lockheed Martin’s shares currently trade at about 17 times the estimated earnings for 2025, which is roughly a 15% discount compared to the S&P 500. A few years ago, Lockheed traded closer to the market multiple, but the current lower valuation reflects investor concerns that the company’s earnings growth may slow.
- Current Valuation: 17 times estimated 2025 earnings
- Discount to S&P 500: Approximately 15%
- Historical Comparison: Previously traded closer to market multiple
However, this concern might be overstated. The U.S. is currently spending about 3.4% of its gross domestic product (GDP) on defense, down from more than 4% a decade ago and over 6% at the end of the Cold War. Despite federal deficits potentially impacting spending levels, the current defense spending to GDP ratio is not unprecedented historically.
Beyond the Headlines: Analyzing Budget vs. Actual Spending
Seaport Global analyst Richard Safran recently pointed out that the difference between what has been budgeted and what has been spent on defense is significant. Supply-chain issues have hampered the ability to deliver equipment, creating a large gap between budgeted and actual expenditures.
- Budget vs. Actual Spending: Significant gap due to supply-chain issues
- Impact: Affects delivery of equipment
This discrepancy has an upside for Lockheed Martin. The company has more than two years of sales in its backlog, ensuring growth regardless of defense budget fluctuations in 2024 or 2025. This backlog provides a cushion and a level of predictability in uncertain times.
The Future of Military Spending
Despite concerns, military spending is still expected to rise in the coming years. Investors should continue to monitor overall defense spending levels but can find reassurance in Lockheed Martin’s substantial backlog. This backlog not only signifies future revenue but also indicates the company’s strong position to weather any short-term budgetary fluctuations.
- Expected Trend: Military spending likely to rise
- Lockheed’s Backlog: Over two years of sales
Lockheed Martin’s ability to maintain a robust backlog and its strategic positioning in the defense sector make it a resilient investment. The company is well-prepared to capitalize on future defense spending, even if growth rates fluctuate.A Reassuring Outlook for Lockheed Martin Investors
In summary, while there are concerns about the sustainability of high defense spending levels, Lockheed Martin’s stock remains a promising investment. The U.S. defense budget continues to grow, albeit at a slower rate, and Lockheed’s substantial backlog provides a buffer against potential budget cuts. Investors can take comfort in the company’s strategic positioning and its ability to navigate supply-chain challenges.
- Key Takeaway: Lockheed Martin remains a solid investment
- Growth Factors: Steady U.S. defense budget growth, substantial backlog
- Investor Reassurance: Strong market position and strategic resilience
By understanding these dynamics, investors can move past concerns about peak military spending and appreciate the long-term value Lockheed Martin offers. The company’s ability to adapt and thrive in the evolving defense landscape ensures it remains a key player in the industry.
