LMT’s Big Quarter. Is the Stock Still Cheap?

The Big Question

Can Lockheed Martin sustain this momentum, or did this quarter simply erase the damage from a brutal 2025?

That is the question sitting at the center of every serious portfolio manager’s conversation this morning. Lockheed just reported Q2 2026 sales of $20.1 billion, up 11% from a year earlier, and raised its full-year guidance. The stock rose more than 5% in early trading. Not bad for a company that spent much of 2025 explaining away program losses and watching its stock fall 13% in a single session after one of those quarterly reports.

So the question is not whether this was a good quarter. It clearly was. The question is what it means from here.

Why Wall Street Is Paying Attention

Lockheed has been a frustrating stock for a lot of institutional investors. The defense spending backdrop has been as favorable as any in a generation. Geopolitical risk has climbed steadily. And yet the company spent 2025 absorbing charges on classified programs, Canadian helicopters, and Turkish utility aircraft that wiped out earnings and shook confidence in management’s execution. Last year’s Q2 was a disaster by comparison: net earnings of just $342 million, or $1.46 per share, including $1.6 billion in program losses, versus $1.6 billion and $6.85 per share in the same quarter of 2024.

This morning changed that conversation substantially.

Net earnings for Q2 2026 came in at $1.8 billion, or $7.94 per share. Cash from operations reached $3.2 billion, up from just $201 million a year earlier, and free cash flow hit $2.9 billion, compared to negative $150 million in the prior-year quarter. The cash story mattered just as much as the headline earnings number, because that was where the bear case had the most ammunition.

The Bull Case

Start with the backlog. Lockheed reported a record backlog of $230.4 billion, up from $193.6 billion at year-end 2025, boosted by $65 billion in new orders during the quarter. The Missiles and Fire Control backlog alone nearly doubled to $87.9 billion, anchored by a $35 billion multi-year contract with the Missile Defense Agency for THAAD interceptors.

That THAAD contract deserves its own conversation. On June 24, the U.S. government signed one of the largest missile-defense contracts in its history, handing Lockheed up to $35 billion for a single purpose: build THAAD interceptors faster than America has ever built them before. The timing reflected real inventory concerns. U.S. forces expended interceptors defending against Iranian ballistic missiles during recent operations, and the magazines came back lighter than the Pentagon would like to admit. This contract is partly the restock order and partly a down payment on a much larger homeland-defense ambition.

The segment-level results were broad-based, not concentrated. Missiles and Fire Control sales rose 19% to $4.1 billion on production ramps for PAC-3, THAAD, and Precision Strike Missile. Aeronautics posted $8.1 billion, up 9%, led by higher F-35 volume. Rotary and Mission Systems rose 9% to $4.4 billion, while Space increased 6% to $3.5 billion.

Then there is the valuation argument. What makes Lockheed particularly interesting at current prices is that the stock trades at roughly 17x forward earnings, cheaper than the S&P 500 average and the least expensive among its defense peers. A 2.1% dividend yield, grown for 23 consecutive years, adds a rare income component to a sector with decades-long tailwinds.

The Bear Case

Here is the part most people skip over this morning.

The comparison quarter was historically weak. The year-earlier period included $1.6 billion in program losses, which makes year-over-year growth look exceptional even if the underlying trajectory is merely steady. Beating a historically bad quarter is not the same as proving structural improvement.

The execution issues from 2025 have not been fully retired. Q1 2026 EPS of $6.44 missed the $6.70 consensus, free cash flow turned negative at negative $291 million, and a $125 million unfavorable F-16 charge highlighted persistent fixed-price program exposure. One strong quarter after a weak stretch is evidence, not proof. The bears are watching the next two quarters carefully before concluding the program risk problem is behind Lockheed for good.

TD Cowen analyst Gautam Khanna maintained a Hold rating and cut his price target from $600 to $560 just 10 days ago. That kind of cautious stance heading into a blowout quarter is uncomfortable to defend, but the underlying logic was not wrong: fixed-price program risk is a recurring issue at Lockheed, not a one-time event.

Slight tangent, but it matters: the THAAD contract is a ceiling, not a settled bill. It is technically a seven-year undefinitized contract action, meaning work starts now and the final price gets negotiated later. The $35 billion is a ceiling, not a settled figure; roughly $843 million in fiscal-2026 money was obligated on the day it was signed. Long-term revenue visibility is real. Near-term cash conversion from that backlog is a different question.

The Evidence

Lockheed reported earnings of $7.94 per share, beating estimates of $7.20 by $0.74. That is a 10% beat on a quarter the options market had priced for roughly 4% movement in either direction. For context, back in July 2025, the stock dropped 13.3% against a 4.4% implied move after those program charges shocked investors. Today’s reaction is the mirror image.

The company lifted its full-year 2026 sales outlook to approximately $79.75 billion to $81.75 billion, up from its prior guidance range of $77.5 billion to $80.0 billion. Full-year diluted EPS guidance was raised to $29.95 to $30.65, from the previous range of $29.35 to $30.25.

The company signed a seven-year framework agreement for PAC-3 missiles in early Q1 2026, and management announced a similar agreement for THAAD. CEO Jim Taiclet said the PAC-3 arrangement will increase annual production capacity from approximately 600 to 2,000 units per year. That is a tripling of output on one of the most in-demand munitions platforms in the world right now.

Over the next 12 months, Wall Street expects Lockheed Martin’s full-year EPS to grow 15.1% from $27.13 to $31.23.

What Investors Are Missing

Everyone is talking about the backlog number. Almost nobody is discussing the structural shift in how the U.S. government is contracting with Lockheed.

The THAAD contract is one of the first major multiyear procurement contracts executed under the Department of War’s Acquisition Transformation Strategy and represents one of the first full-scale transitions from framework agreement to contract execution under that initiative. That matters beyond Lockheed. It signals a change in how the Pentagon intends to procure weapons at scale going forward, moving toward longer-duration, higher-commitment vehicles that give primes like Lockheed the investment certainty to actually build capacity.

If that contracting model scales across other programs, it compresses the risk premium the market has historically assigned to defense stocks. A 17x forward earnings multiple on a company with a $230 billion backlog, growing production commitments on multiple critical platforms, and a newly structured contract model starts to look like a discount rather than fair value.

The $3.45 billion acquisition of Ultra Maritime, announced in early July, also deserves attention. It signals a strategic push toward higher-margin undersea warfare and anti-submarine capabilities, an area that has received relatively little attention in the current defense spending debate, which has focused heavily on missiles and air power. Undersea warfare is the next conversation. Lockheed just positioned itself to lead it.

Stocks to Watch

Lockheed Martin (LMT) is the obvious centerpiece. Sales grew 10.5% year over year to $20.06 billion, and the company’s full-year revenue guidance of $80.75 billion at the midpoint came in 2% above analyst estimates. The stock has underperformed the defense sector over the past 18 months. That gap is now closing, and quickly.

RTX Corporation (RTX) deserves a look as the other side of the same missile defense trade. RTX posted Q1 2026 sales of $22.1 billion, up 9% year over year, with its order backlog increasing to $271 billion. Adjusted EPS rose 21% to $1.78, well above expectations. Raytheon’s PAC-3 interceptor production ramp is directly tied to the same demand signal driving Lockheed’s Missiles and Fire Control surge.

Northrop Grumman (NOC) is the sleeper in this group. The most significant development at Northrop is the B-21 program’s shift from drag to driver, with Aeronautics Systems swinging from a $183 million operating loss in Q1 2025 to $305 million in operating income in Q1 2026. The market has not fully credited that reversal. Lockheed is a confirmed prime contractor on the Golden Dome space-based interceptor program alongside Northrop Grumman and Anduril Industries, which means the next leg of defense spending may benefit both companies simultaneously.

General Dynamics (GD) rounds out the watchlist for investors focused on execution quality rather than program ramp risk. The company’s mix of shipbuilding, combat vehicles, and business aviation provides exposure to the defense spending cycle with less concentration in the fixed-price development contracts that have caused Lockheed and others headaches in recent years.

The stock is up 5% today. The backlog is at a record $230 billion. The government just committed to a new contracting model that, if it holds, changes the risk profile of Lockheed’s business for years.

Whether this is the start of a sustained re-rating or just one good quarter after a string of bad ones is the question every serious investor needs to sit with. One quarter does not close that debate. But it does shift the burden of proof.

Worth watching closely.

— The Editors, Wall St. Mavens