Lockheed Martin Corporation (NYSE:LMT): Turbulent Times Ahead

We came across a bearish thesis on Lockheed Martin Corporation (NYSE:LMT) on ValueInvestorsClub by 85bears. In this article, we will summarize the bears’ thesis on LMT. The company’s shares were trading at $443.00 when this thesis was published, vs. the closing price of $477.08 on Apr 16.

Two fighter jets in flight, highlighting the technology and experience of the companies combat aircraft.

LMT is an aerospace and defense company that engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide.

Prime defense companies like LMT are facing tough competition from tech companies like Palantir and Anduril. These companies offer superior software-based defense technologies that are not only cheaper but unmanned and autonomous. These limitations were reflected in the latest engagements in Israel, Ukraine and the Red Sea with the DoD now looking for superior technology.

The current F-35 fleet is expensive to maintain and supply chain disruptions have forced the DoD to look for alternatives. The Collaborative Combat Aircraft program is set to be a replacement for manned aircrafts with costs estimated at a quarter of what is spent on F-35s. While a complete cancellation of the F-35 fleet is unlikely, one can expect a gradual reduction in fleet size and future orders over the long term.

F-35 delivery in 2025 is expected to be 160 units, up from 110 in 2024. EBIT should rise $1.4-2.2 billion, a 16-24% increase. The existing 1000 F-35 aircraft fleet contributes $600-800 million (7-9% of the total) in EBIT from upgrades and service maintenance. The F-22 fleet should add another $100-150 million to LMT’s EBIT. One can expect spending constraints resulting in production cuts for F-35 to the tune of 25-50%. This would hit EBIT by 4-12% and earnings by 4-14%. Lower production would reduce fleet size and impact the maintenance business, leading to a further drop in earnings.

LMT has been historically trading between 10-20x EPS and is currently trading at 21x its trailing 12-month EPS. During the Obama administration spending cuts, LMT traded at levels much below 14x and a derating could mean that LMT breaches this level. Using 14x multiple, the potential downside for LMT stands at 33%.

While we acknowledge the potential of LMT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than LMT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.