Lockheed Martin is recognized as the leading defense stock to consider amidst escalating global tensions, supported by the company's recently increased share repurchase authorization, indicating an anticipated improvement in free cash flows as per RBC Capital Markets. The ongoing conflict in the Middle East has raised the global threat level, leading to a belief that there will be heightened urgency in the 2025 U.S.
Department of Defense budget process, which could potentially boost international sales for the defense contractor, according to a client note from the brokerage sent on Monday. Historical data reveals that the defense sector typically excels during monetary easing phases, achieving an average outperformance of 23%.
This trend is significantly amplified, showing greater performance 12 months post the initiation of easing, as observed by RBC analyst Ken Herbert. In the previous month, the Federal Reserve reduced its benchmark lending rate by 50 basis points, bringing it to a range of 4.75% to 5%. Herbert elaborated that the onset of a new easing cycle, combined with the recent surge in geopolitical tensions, is likely to enhance market sentiment, yielding further favorable ratings for Lockheed Martin.
He expressed optimism that this positive sentiment shift is likely to persist into the year 2025. Recently, Lockheed Martin took a significant step by increasing its current share buyback authorization by $3 billion, raising the overall buyback plan to about $10 billion. RBC viewed this development favorably, anticipating that it will be underpinned by improving free cash flows.
The financial forecast indicates mid-single-digit growth in Lockheed's 2025 free cash flow, which is expected to positively influence the stock price. Additionally, the company’s capability to pre-fund $3 billion in pensions coupled with the impending third-quarter results are expected to resonate well with the investment community, as noted by Herbert.
Investors are keenly awaiting the release of Lockheed's latest quarterly financial report, scheduled for later this month. RBC predicts that the focus will be on Lockheed's delivery metrics for F-35 fighter jets and an initial forecast for the year 2025, among other metrics. The brokerage currently estimates a third-quarter topline growth for Lockheed at around 3%, alongside free cash flows projected at $1.3 billion.
RBC has upheld its ‘outperform’ rating for Lockheed's stock, raising the price target from $600 to $675. According to Herbert, there is a notable improvement in sentiment surrounding Lockheed, attributed to expected sales growth surpassing initial projections. Furthermore, the easing monetary policy cycle is anticipated to bolster the stock's performance, along with improved visibility on the production and delivery of the F-35 fighter jets, which is seen as an overall positive indicator for the company’s future prospects..