Lockheed Martin Earnings Were Solid. Why the Stock Is Falling.

Shares of Lockheed Martin are up 7.3% year to date.

Luca Barioulet/AFP via Getty Images

Defense giant Lockheed Martin cruised past Wall Street second-quarter earnings expectations—with one caveat—and raised its full-year earnings guidance. Still, shares tumbled Monday.

For the quarter, Lockheed (ticker: LMT) reported $6.52 in per-share earnings from $17 billion in sales, in line with Wall Street’s expectations for $6.53 in per-share earnings from $17 billion in sales. But Lockheed recorded a $0.61 per-share charge related to “performance issues experienced on a classified program” at its jet-making franchise Aeronautics. These kinds of expenses, labeled as a special charge by Lockheed, typically don’t repeat.

“The classified nature of this program precludes us from discussing this matter in depth,” said CEO Jim Taiclet on the company’s earnings conference call. “We can say, that our customer is highly attracted to the capabilities that we are developing on their behalf. That we’re committed to delivering these capabilities and that the long-term potential of this solution is significant for the company.”

Removing that 61-cent charge makes Lockheed’s quarter look solid. What’s more, the company raised its full-year guidance. Lockheed now expects to earn about $26.85 for full-year 2021, up from the guidance of $26.55 given in April.

Lockheed raised its full-year earnings guidance when reporting both its first- and second-quarter numbers.

Despite the increased forecast, investors are focused on the unusual charge. “Lockheed is one of these names that is strong…and has great cash flow,” Edward Jones analyst Jeff Windau told Barron’s. “They aren’t a company that usually gives you surprises.”

“Lockheed’s execution over recent years has been so good that we can’t even remember when the last time was that we saw the company take an operating charge,” wrote Vertical Research Partners analyst Rob Stallard in a Monday report. “We would imagine that investors had been expecting the usual ‘beat and raise’ performance for 2Q, and so today’s inline result with no change to the operating guidance is likely to prove a disappointment.”

Lockheed stock was down about 3.2% in late Monday trading. The S&P 500 and Dow Jones Industrial Average were both 0.2% higher. “Should the stock sell-off heavily, then this could be a good entry point,” Stallard wrote. He rates shares Buy and has a $443 price target for the stock.

Windau also rates the shares at Buy, but doesn’t publish price targets for his stocks.

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“In my first year leading our company, I’m proud of the extraordinary resolve demonstrated by our 114,000 team members to rise above the challenges of the pandemic in support of our customers, our nation and our allies.” said Taiclet in the company’s news release. “Our teams continue to deliver on key platform programs while also advancing technologies critical for 21st century deterrence and scientific discovery.”

Sales grew in each of the company’s segments: aeronautics, missiles, helicopters, and space systems. Total sales rose about 5% year over year.

On a conference call held for analysts and investors, analysts focused mainly on the outlook for sales growth. Lockheed management sounded optimistic, saying the company has the right technologies for the coming age of war fighting.

Year to date, Lockheed stock is up 4%, trailing behind the comparable 17.5% gain of the S&P 500. Lockheed stock, however, trades for 13.2 times estimated 2022 earnings. The S&P 500 trades for 20.5 times estimated 2022 earnings.

Write to Al Root at allen.root@dowjones.com

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