Lockheed Martin(NYSE: LMT) received some support recently, with a Citigroup analyst reiterating a buy recommendation and a price target of $508.
Budget cuts coming?
The stock had come under pressure after a Reuters article claimed that President Biden wants an 18% reduction in the number of F-35s the Pentagon orders next year as the administration looks to make savings to meet Congress spending caps.
However, as the analyst notes, history suggests this kind of speculation isn't new, and the result is usually in line with initial projections. In addition, there's no shortage of geopolitical tension right now, and international demand for F-35s remains robust.
What does it mean for investors?
Defense spending is at a record high, and credit rating agencies downgraded and lowered outlooks on U.S. debt last year.
In addition, defense companies, including Lockheed Martin, are suffering margin pressure, partly because, in the words of Lockheed Martin's CEO James Taiclet on a recent earnings call, the government has "been taking advantage of that monopsony power, if you will, over the industry."
Image source: Getty Images.
This sort of commentary suggests that even if spending increases, Lockheed Martin will find margin expansion hard to come by. Indeed, management's comments on margin in the same earnings call referenced above suggest only a moderate increase in profit margins over the next few years.
Meanwhile, Lockheed Martin has to get back on track with F-35 deliveries falling behind in 2023 and disappointing the market with its delivery guidance in 2024. The near-term outlook might not be as bad as the Reuters article suggests, but there are still medium-term issues with Lockheed Martin's margins, F-35 deliveries, and the long-term future of defense spending. That means, the 20% upside to the Citigroup analyst's price target may not materialize anytime soon, though over the longer term, that's a distinct possibility so long the stock's secular drivers remain in place.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.
