Analysts at Deutsche Bank have downgraded their recommendation from a Buy to a Hold after Lockheed Martin (LMT, Financial)'s mixed Q3 2024 figures.
Net sales of Lockheed Martin stood at $17.1 billion and were 1% higher compared to last year's results in the same quarter. The company posted net earnings of $1.6 billion, or $6.80 per share, compared to $1.7 billion, or $6.73 per share, in Q3 2023. Free cash flow was $2.1 billion, down from $2.5 billion in the same quarter last year. Lockheed Martin increased its quarterly dividend by 5% to $3.30 per share.
Despite these results, Deutsche Bank was disappointed because the revenue did not meet their expectations. Furthermore, Deutsche Bank saw that China's combat aircraft capabilities are now so advanced that could threat demand for Lockheed Martin's F-35 aircraft in the long term.
For the Q3 results and potential threats from China's combat aircraft advancement, Lockheed Martin was downgraded to “Hold” from initially “Buy” with reduced price target from $611 to only $523 per share.
I personally say that Deutsche Bank's downgrade to Lockheed Martin is a premature decision as there are not yet evidence that China's combat aircraft has surpassed the sales of Lockheed Martin's F-35 aircraft.
China's Shenyang J-35 fighter jet is China's fifth-generation stealth fighter jet and just made its debut in November 2024 at the Zhuhai Airshow, and Pakistan has approved the purchase of 40 J-35 jets. If Shenyang J-35 costs $70 million per unit, 40 purchases would cost $70 million x 40 = $2.8 billion.
China sales for their combat aircraft is still relatively low compares to the sales of Lockheed Martin's fighter jet. For instance, between 2000 and 2020, China exported only $7.2 billion worth of military aircraft, while the United States exported $99.6 billion in the same period.
Yes, indeed China has made incredible advancement in their combat aircraft, but Deutsche Bank should have given some time to see how the situation develops as Lockheed Martin is not necessarily losing its clients yet, in fact it has been securing major defense contracts.
Recently, they were awarded a $335.73 million Navy contract modification and a $3.37 billion Navy contract modification. These contracts indicate Lockheed Martin is still relevant in the defense industry, and it is not easy for important clients to shift to another supplier. Looking at the contracts it secures, Lockheed Martin still pockets its clients' trust.
