Lockheed Martin (LMT) is the “prime” defense stock to own amid escalating global tensions, while the company’s recently increased share repurchase authorization supports an expected improvement in free cash flows, RBC Capital Markets said.
The war in the Middle East “has elevated the global threat level, which we believe will support greater urgency around the (2025 US Department of Defense) budget process and could contribute to higher international sales,” the brokerage said in a client note emailed Monday.
Historical trends show that the defense industry usually outperforms during periods of monetary easing by an average of 23%, with “greater outperformance 12 months after the start of easing,” RBC analyst Ken Herbert wrote. Last month, the Federal Reserve cut its benchmark lending rate by 50 basis points to a range of 4.75% to 5%.
“We believe the beginning of a new easing period, coupled with increased geopolitical tensions recently, will increase sentiment and provide further positive re-ratings for (Lockheed Martin),” Herbert said. “We believe the recent positive sentiment shift will continue into 2025.”
Last week, the defense contractor increased its current share buyback authorization by $3 billion to about $10 billion. RBC views this repurchase program increase “positively” and said it will be supported by improving free cash flows.
The brokerage expects mid-single-digit growth in Lockheed’s 2025 free cash flow to help lift the share price. The company’s potential $3 billion in pension pre-funding and third-quarter results will likely be well-received by investors, Herbert said.
The company is scheduled to release its latest quarterly financial report later this month. RBC expects investor focus to be on Lockheed’s deliveries of F-35 fighter jets and an initial outlook for 2025, among others. The brokerage currently estimates Lockheed to log third-quarter topline growth of about 3% with free cash flows of $1.3 billion.
The brokerage maintained its outperform rating on Lockheed’s stock and lifted the price target to $675 from $600. “We believe sentiment on (Lockheed) is improving as the company benefits from better than expected sales growth,” Herbert said. “Moreover, we believe the easing cycle will support the stock, and better visibility on the F-35 is a positive.”