Orbit + Aero + Defense

Key Takeaways

• Two simple engines:
  • Orbit (Space): building space-based “defence infrastructure” (sensing, tracking, comms).
  • Aero + Defence: the big money makers today (F-35, missiles/missile defense, radars/mission systems).
• Orbit is the long-term bet: space is becoming a must-have layer of modern defense, like “roads and rails” for information and targeting.
• The Iran War has dramatically pumped revenue into the company
  • As of mid-March the US and allies have fired over 5’000 munitions with Lockheeds PAC-3 and THAAD systems providing protection in the Gulf
  • With this the demand for these systems has skyrocketed forcing the Pentagon to seek $200 billion in emergency funds to replace these.
• Aero + Defense is the cash engine: demand is strong, backlog is huge, and missiles are in high demand.
• But recent results show a gap: revenue is growing, yet profits/margins didn’t grow as cleanly, especially in Space and some mission systems.
• Stock already rerated: after a big run-up, the market may already price in a lot of the “good news,” so upside needs proof, not promises.

Catalyst

• 2026 is the “prove it” year: guidance points to better margins and mid-single-digit sales growth.
• What investors want to see:
  • Orbit programs scaling without constant cost surprises
  • Missile ramp-up costs settling down
  • F-35 and mission systems showing real operating leverage (more revenue → more profit)
• If operating upside is limited: the nearer-term catalyst becomes capital return (buybacks + dividends) rather than growth.
• The US is now providing support with a mandate to quadruple production of their aero defense systems specifically the PAC-3 from 600 units to 2;000 annually.
• Revenue has been guided for $77b-$80b with $194 billion in backlog.

Assumptions

• Orbit keeps getting funded: governments keep spending on space-based warning/tracking because it is now core to missile defense.
• Lockheed can “industrialize orbit”: not just building satellites, but building them repeatably, on schedule, at controlled cost (like a production system).
  • https://simplywall.st/stocks/us/capital-goods/nyse-lmt/lockheed-martin/event/1981163382
• Aero + Defense margins recover: recent margin pressure is temporary (ramp-up/mix/execution) and improves as programs stabilize.
• Shareholder returns stay strong: stable free cash flow continues to be returned via dividends and buybacks.
• Iran war continues: the missile shield will be the central pillar of revenue for a number of years due to the war exposing countries strengths (and weaknesses) with these types of attacks.
• F-35 maintenance: another by-product of the war is the amount of flying the F-35’s are doing means an increase in maintenance which is a high margin revenue pillar.

Risks

• CapEx keeps cash flow flat: growth may require high spending, so free cash flow doesn’t rise much even if sales rise.
• Sales without profit: strong demand is real, but if margins don’t improve, the business becomes “busy” without creating extra value.
• Orbit is complex and lumpy: delays, cost overruns, or integration issues can push out timelines and hurt margins.
• Valuation risk: after a strong rally, even “good execution” might only maintain the stock unless there’s a clear margin/FCF upside surprise.
• One partner, one problem: The US Government supplies a consistent 70% of revenue for Lockheed with contacts over the last 10 years. If military and defense have a new level of priority with future governments (or even current administration) this would have huge, long lasting impacts for the company.
• Too much growth: the demand is massive but that has a risk of not been able to hit their targets with supply which could affect relations with the US government (its biggest customer).
• Cooling off: if Iran ceases in the immediate future then the contracts with the US government will stretch out from 1 year delivery to 2 or 3 which will cause issues

Valuation

• Expect revenue to increase but costs will as well with inflation now going back up which will hit the supply train.
• Its currently at a PE of 29x-30x which has elevated from 20x 6 weeks ago
  • Expect this to go down by the end of year as Iran will most likely taper off.
• Margins will most likely be hit as well dropping as costs go up with the ramp up in products
• 3-5 years should see it hitting $100b by 2030 in revenue