It’s easy to point to Lockheed Martin‘s (NYSE: LMT) soaring order backlog, up to $292 billion in the third quarter from $194 billion at the start of the year, and lazily conclude that the stock is worth buying. However, the number only tells part of the story because it’s improving not only in quantity but also in quality. Here’s why both factors support buying the stock.
Lockheed Martin’s backlog
The following table shows each Lockheed Martin segment and how backlog has increased in each one through 2026. The first point to note is that Lockheed’s backlog is increasing in its highest margin segment: missiles and fire control (MFC). This implies the company’s profit margin will improve as its backlog turns into revenue.
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Segment
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Backlog End of 2025
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Backlog End of September 2026
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Backlog Increase
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Operating Profit 2025
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Operating Margin 2025
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Aeronautics
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$59,435 million
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$57,331 million
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($2,104) million
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$2,086 million
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6.9%
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Missiles and Fire Control
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$46,650 million
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$142,517 million
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$95,867 million
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$1,989 million
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13.8%
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Rotary and Mission Systems
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$47,715 million
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$49,435 million
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$1,720 million
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$1,323 million
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7.6%
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Space
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$39,822 million
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$42,701 million
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$2,879 million
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$1,345 million
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10.3%
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Data source: Lockheed Martin presentations.
Reducing execution risk
The increase in the MFC backlog also implies a reduction in overall risk. To understand why, you first have to appreciate the many issues that defense companies, including Lockheed Martin, Boeing, and RTX, have had in recent years in delivering on complex fixed-price development programs for the Department of Defense. In a nutshell, many of these contracts have caused multibillion-dollar charges and losses at defense companies, as well as friction exemplified by the presidential executive order issued in January that instructed the Secretary of War to “identify any defense contractors for critical weapons, supplies, and equipment that are underperforming on their contracts” and take action that could result in restricting share buybacks or dividends.
As such, defense contractors would ideally prefer to:
- Increase their backlogs in relatively less complex contracts that tend to involve producing tried and tested technologies rather than highly complex programs that require significant research and development risk.
- Improve the conditions on which they do agree on more complex contracts.
The evidence from the third quarter is that Lockheed did both, and the recent update went a long way to placate fears over the risk in its government contracts.
First, as Chief Financial Officer Evan Scott noted on the earnings call: “The largest contributor in the quarter was the PAC-3 seven-year contract, which brings that multiyear contract to a total value of up to $58.6 billion.” The Patriot Advanced Capability (PAC-3) is a missile defense system. It’s a mature technology, so producing it carries little development risk. Too be sure, there are significant execution risks around it, not least in ensuring its supply chain is healthy. Still, it’s nowhere near the overall risk of a brand new development program.
Improving defense contract conditions
Second, it appears that defense companies and the DoD are refining their contractual relationships toward a more mutually beneficial model centered on long-term agreements that enable defense contractors and their suppliers to invest with greater confidence. Chief Executive Officer Jim Taiclet said that key provisions include long-term duration (the PAC-3 deal is more than seven years), fixed-price escalators (including an inflation escalator adjusted for “the industry that we’re in”), cash flow neutrality (government provides up-front payments to cover Lockheed’s expansion costs before it delivers defense products), and cancellation protections (a recovery mechanism to protect Lockheed from a future administration reducing orders).
Where next for Lockheed Martin
The backlog is soaring; the profit margin in it is likely rising too, and the risk in its backlog and overall business is falling. Meanwhile, defense contractors and the DoD appear to be building a more mutually beneficial relationship. Although there are still execution risks to overcome, there are clear improvements in Lockheed’s prospects, with the company trading at 22 times earnings and 18.6 times free cash flow expectations for 2026. Lockheed looks like a good value for defense-focused investors.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Boeing, Lockheed Martin, and RTX. The Motley Fool has a disclosure policy.
