Now you have heard the news: Lockheed-Martin (NYSE:LMT) reported his third quarter result last week, and the stock is down 11% since this news was released. What you can not I know it’s Why Lockheed’s stock sank so quickly – and so far.

Lockheed Martin is the world’s largest pure-play defense company and an industry giant. aerospace industry. The problem is that in the third quarter, it was not particularly successful in either aerospace or space.

Lockheed Martin Third Quarter Earnings Report

In view of the warning I gave regarding valuations of defense stocks and Lockheed Martin’s valuation in particular earlier this month, perhaps this should come as no surprise. At a valuation of 2.3 times company value to pre-earnings sales, which was well above its historical average, Lockheed Martin stock was priced to perfection.

He failed to achieve this perfection last week.

Overall, the company grew sales and came in just 1% year over year in the third quarter. In fact, total net income fell slightly – only earnings per share increased. The defense giant’s free cash flow fell 18% year-over-year. What’s really interesting, however, is that the two areas in which one would expect an “aerospace” specialist to excel – Lockheed’s aerospace business – were the two areas in which Lockheed’s performance was the weakest.

Rising costs and delivery delays in the company’s F-35 Lightning II fighter jet division contributed to a 3.5% decline in revenue in Lockheed’s largest business, aerospace. , although profit margins have improved slightly. Space was another disappointment, being the only other Lockheed division to suffer a decline in sales, albeit only 1%, and with improved margins.

Lockheed saw growth in its missile divisions (sales up 8%) and rotary divisions (such as helicopters), where sales increased 6%. Profit margins also improved in the missile division, while they contracted in the rotary missile division.

What’s Hitting Lockheed’s Aerospace Business?

Lockheed management blamed “decreased production contract volume due to delays in receiving contract authorizations and additional financing” for costing it $480 million in sales of its F-35 fighter jet. in the third trimester. On the positive side, better-than-expected sales of the C-130 transports and F-16 fighters helped make up the difference. (And Lockheed sales can be expected to increase much more help of its F-16 program in the future).

That being said, sales delayed While Lockheed works out contract details with its government customer, they are not the same as sales lost. Worst case scenario, they’ll take a little longer to come to fruition, but that shouldn’t disrupt Lockheed’s long-term revenue from the F-35.

I’m actually a little more worried about the space side of things. On the one hand, Lockheed seems to be making some progress in this area, recently acquire Terran Orbital at a favorable priceand thus securing a multi-billion dollar contract with the Space Force. The continued improvement in operating margins for the space business (now 9.9% year-to-date) is also encouraging. And space profit margins could continue to improve over time as United Launch Alliance’s Vulcan program accelerates. Lockheed owns 50% of ULA; Boeing (NYSE:BA) owns the remaining 50% and takes half of the profits.

(Note: Lockheed noted that its share of ULA’s profits was just $5 million on the rocket launched in Q3 2024, compared to $10 million on the single rocket launched in Q2 2024 and $15 million dollars for the rocket launched in the third quarter of 2023. Investors curious about ULA’s profit margins can multiply these figures by two to see the total profit ULA made before Lockheed took its cut).

On the other hand, space has been neglected in the company’s activities. conference call after the results. Lockheed pointed out that it recently won $3.2 billion in contracts to work on Trident missile programs for the U.S. Navy ($2.1 billion of which will go to Lockheed’s space division), and an additional reward of $300 million build mapping instruments for the National Oceanic and Atmospheric Administration (this could reach $600 million). But otherwise, the company has remained silent on space work, and this division remains Lockheed Martin’s smallest and least profitable.

Combined with continued media concerns about the rising cost of the Space Launch System rocket, which includes an Orion capsule built by Lockheed Martin, and calls to replace the SLS with SpaceX’s Starship as a transport rocket to the moon, “the ‘space’ appears to be Lockheed’s weakest link. That’s not the only reason I’m staying away from the stock: valuation is a bigger concern for me.

But that’s one of the reasons.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.