3 Reasons to Avoid LMT and 1 Stock to Buy Instead

Although Lockheed Martin (currently trading at $501.95 per share) has gained 5.6% over the last six months, it has trailed the S&P 500’s 22.9% return during that period. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Lockheed Martin, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.

Why Do We Think Lockheed Martin Will Underperform?

We're swiping left on Lockheed Martin for now. Here are three reasons there are better opportunities than LMT and a stock we'd rather own.

1. Weak Backlog Growth Points to Soft Demand

Investors interested in Defense Contractors companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Lockheed Martin’s future revenue streams.

Lockheed Martin’s backlog came in at $166.5 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 7.3%. This performance slightly lagged the sector and suggests that increasing competition is causing challenges in winning new orders.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Lockheed Martin, its EPS declined by 4.9% annually over the last five years while its revenue grew by 2.7%. This tells us the company became less profitable on a per-share basis as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Lockheed Martin’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

We see the value of companies helping their customers, but in the case of Lockheed Martin, we’re out. With its shares trailing the market in recent months, the stock trades at 18.4× forward P/E (or $501.95 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.

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