Summary:
On January 28, 2025, Lockheed Martin shocked the market with a 66% EPS miss, primarily due to cost overruns on some classified aviation programs. While that sent the stock tumbling further than it already had, I saw a value opportunity grounded in long-term defense dynamics.
Lockheed reported a $173 billion backlog as of Q1 2025, enough to cover over two years of sales. That’s more than just stability, it’s multi-year revenue visibility from committed projects. Global defense spending is at record highs: In 2024, global defense expenditures hit $2.46 T, up from $2.24 T a year earlier; and the U.S. accounted for much of that growth. With higher geopolitical tensions, budgets aren’t shrinking, they’re expanding.
I spoke with industry insiders who emphasize that “custom-made” defense parts often costs far more than it looks. There have been significant talks during the Trump campaign speaking on how contractors have been overcharging the Pentagon and how the implementation of the Department of Government Efficiency will help cut the fat out. However from my research, these increased prices don’t mean gouging, it means these systems use rare materials, precise tolerances, and critical subsystems. Even “regular-looking” parts can cost millions because of quality assurance, specialist machining, and performance specs. So when people cry “waste,” they overlook the real cost of national security capabilities. This “fat cutting” has been a major reason why Lockheed fell over 25% from pre-election highs.
In 2025, China’s budget rose ~7.2% to ~$246 B—making it the world’s second-biggest spender . The Biden-era Pacific Deterrence Initiative $40 B program to counter China in the Indo-Pacific remains in place. Trump returns to office and throws proposals for a 13% defense budget hike to $1T in FY2026 and a “Golden Dome” space-based missile shield ($175 B). NATO is rearming and increasing their defense budget under U.S. pressure, which raises global defense readiness. Together these facts spells multiple tailwinds for budget increases, far from contraction fears.
Lockheed’s 66% EPS miss stemmed from $1.7B in fixed-price contract losses on specific aviation programs. It wasn’t due to backlog erosion or demand collapse. In Q1 of 2024, Lockheed beat consensus, revenue up 4.5% to $18.0 B, EPS beat, and $955 M free cash flow. Lockheed management reaffirmed guidance and emphasized backlog strength during their earnings call. Shift toward cost-plus contracting (less risk on overruns) was noted, reducing their downside on future contracts.
Aiming for pre-election highs at around $618.