'There's no guarantee the pain will end': why analysts are disappointed with Lockheed

Investment company Truist Securities downgraded the shares of defense giant Lockheed Martin, refusing to recommend buying them because of a wave of unexpected write-offs and operational failures. The company's long-term growth strategy is at risk, according to analysts whose report is cited by Seeking Alpha. Lockheed can't explain the write-offs because they relate to a classified program. But worse, the weapons developer can't guarantee that this is the last time it will record a loss on a classified program.

Defense contractor Lockheed Martin's $1.8 billion loss write-downs, reported in its second-quarter report, were much larger and broader in scope than Truist Securities expected, aerospace and defense industry expert Michael Charmoli wrote July 22. He downgraded Lockheed's stock from "buy" to neutral (equivalent to a "hold" recommendation) and reduced the target from $554 to $440. This is still 5% above the current price of the stock.

"This may be a 'general cleanup quarter' amid the recent CFO change. Nevertheless, we believe the company may also face additional write-downs on existing programs in the future amid increased scrutiny and oversight," Charmoli wrote in a note that is cited by Seeking Alpha.

The write-downs in the second quarter affected the company's Aerospace and Helicopter business segments (Rotary and Mission Systems) and, according to the analyst, point to structural problems in the company's legacy project management system.

"We are downgrading Lockheed's stock as we are not confident that management will be able to execute its stated long-term growth strategy," Charmoli wrote.

Among the key risks, Truist highlighted the possibility of new losses, lower free cash flow and uncertainty around projects such as the F-35 and the Next-Gen Interceptor (NGI) ballistic missile interceptor system.

- $950 million in pre-tax losses on a classified project of the Skunk Works unit, which develops experimental and advanced aviation and defense technologies.

- $570 million in write-downs on the Canadian offshore helicopter program due to expanded missions and revised expectations.

- $95 million - losses on the helicopter supply program for Turkey (TUHP) caused by geopolitical sanctions. The U.S. imposed sanctions on Turkey in 2020 over the purchase of the Russian S-400 system.

- $66 million - losses on the U.S. NGAD (Next Generation Air Dominance) program for the development of sixth-generation fighter jets, which was transferred to Boeing.

Total write-downs totaled $1.77 billion, bringing the operating margin down to 3.1%. That's down 8 percentage points from a year earlier, Seeking Alpha notes. The Aerospace segment saw margins turn negative (-1.3%), while Rotary and Mission Systems saw margins dip to -4.3%. Adjusted earnings per share were just $1.46 versus the consensus forecast of $6.52: program losses ate up $5.83 per share.

Adding further pressure to the stock was the disclosure of Lockheed's possible $4.6 billion tax liability, which relates to an accounting policy change approved in 2017 but subsequently challenged by the U.S. Internal Revenue Service, Seeking Alpha explains. Lockheed has already set aside $100 million and intends to appeal the claim, including the possibility of litigation.

Truist also lowered Lockheed's 2026 free cash flow (FCF) forecast by 11% to $6 billion, noting that the impact of the write-downs will still be felt. Free cash flow is a key metric that reflects a company's ability to fund operations, pay down debt, pay dividends or invest in growth. The previous forecast called for FCF growth of 1% to 5%.

"Given second quarter events, expected pressure on FCF in 2026 and the risk of new project write-downs, we no longer believe Lockheed will be able to achieve the upper end of its strategic outlook," Charmoli said in the report.

The analyst is particularly focused on the NGI project and the entire aerospace product line, where he believes new problems may be uncovered as part of a tightened internal audit. "This indicates that the previous system of project evaluation and oversight was fundamentally flawed," Charmoli added.

While recent tax law changes may partially offset the pressure on cash flow in 2025 (expected benefit of $400-600 million), the overall picture remains unfavorable, the analyst emphasizes.

"We believe the stock will remain sideways for the rest of the year due to a lack of growth drivers and will trade at a discount to peers," Charmoli summarizes.

"There is no guarantee that the pain will end," wrote Vertical Research Partners analyst Rob Stallard in a note cited by Barron's. - While Lockheed's management provided a number of reasons why these write-downs were reflected in the second quarter, it gave investors little reassurance that the risks are over. Lockheed cannot say how much longer the [classified] [Skunk Works] program will continue because of the fact that it is classified."

Stallard cut its target price on Lockheed shares to $460 from $505 and recommends Hold. According to data from MarketWatch, of the 25 analysts tracking the defense company's securities, only nine now recommend buying them, down from 11 a month earlier. 15 advise holding in a portfolio and one advises selling. The Wall Street consensus forecast is for $491.8, up 17% from Wednesday's closing price.

This article was AI-translated and verified by a human editor