Air Power At The Center Of Military Power
Innovation and military technology have been deeply intertwined for decades, especially with the emergence of industrial warfare and the importance of advanced weapons. As a result, some of the most innovative companies in the world are also the largest military contractors.
This is especially true in the USA, where private companies are the primary providers of technology to the Department of Defense (DoD), compared to other countries, including NATO allies, where nationalized companies are often the leading weapon suppliers.
Similarly, space technology and space exploration are entirely the result of massive Cold War-era investments into the space race with the Soviet Union, themselves relying on German rocket technology developed in World War 2.
And at the core of some of the most advanced technologies finding applications in both military and civilian items, is one company that has been pushing the edge of what engineering can accomplish: Lockheed Martin.
Lockheed Martin Corporation (LMT -4.43%)
Lockheed Martin’s History
Lockheed Martin is the result of the 1995 merger between defense companies Lockheed Corporation and Martin Marietta. These corporations themselves were the result of previous mergers and acquisitions, in a trend that has seen the US defense industry consolidate into a handful of larger conglomerates like Boeing (BA +1.94%), Raytheon (RTX -1.55%), General Dynamics (GD -0.37%), and Northrop Grumman (NOC -2.91%).
Source: Prdctnomics
The company’s rise goes back to World War 2 when it was a major contributor to the war effort. Notably, its “Skunk Works” highly secured facilities were instrumental in developing most of the US’ most important military aircraft, like the P-38 Lightning in 1939, and later on the SR-71 Blackbird, F-117 Nighthawk, F-22, and F-35.
Multiple Activities
Aircraft / Aeronautics
Military aircraft were Lockheed’s original core business, and today, they are still its largest business line, accounting for around 40% of total revenues.
This includes legacy updated systems like the Black Hawk helicopters or the F-16, as well as advanced equipment like the F-35 as well as flying radar planes or logistical aircrafts like the C-5 Galaxy & C-130J Super Hercules.
Source: Lockheed Martin
Lockheed is instrumental in developing the overall planes and many of their subsystems, from radars to navigation, training and simulation, control centers, etc.
As the US military and NATO armies in general are very airforce-centric, this has been a very lucrative segment for Lockheed.
Missiles And Fire Control
This segment has obviously been growing from the massive ammunition consumption driven by the war in Ukraine, with a 25% growth in sales between 2023 & 2024.
It currently makes up around 17% of total sales.
Among these systems can be mentioned in particular:
- GMLRS: 70km+ precision artillery system.
- JAASM: long-range, air-to-ground cruise
- Javelin: shoulder-fired anti-tank missiles.
- ATACMS: 300km-range rocket artillery
- HIMARS: long-range missile artillery.
Source: Lockheed Martin
Overall, this is a segment that was seen as important, but secondary to the airborne systems. The return of trench warfare and artillery duels in the war in Ukraine has changed this perception.
Notably, the HIMARS, itself firing the GMLRS & ATACMS missiles is now a must-buy for many Eastern Europe countries like Poland as well as the US army and other NATO allies.
At this point, it seems that Lockheed Martin’s main issue with these systems is not so much selling them but managing to produce enough in due time to answer the demand.
Precision Systems & Defense
As missiles, artillery, and drones become a more serious threat, the importance of defense systems against them grows accordingly.
It currently makes up around 24% of total sales.
Lockheed is here, too, a key supplier to the US & NATO armies and navies. For example, it produces:
This is also a segment that had been somewhat neglected during the years of the “war on Terror”, focused on counter-insurgency. The return of peer-level adversaries like Russia and China is now pushing NATO to strengthen this sector and radically increase its ammunition inventories.
Space
This segment was initially mostly dedicated to military space applications, mostly surveillance and warning satellites. It has since expanded to many other civilian applications, like for example the GPS satellites (initially a purely military technology), NASA’s Orion spacecraft, and the climate observation satellites GOES-R series.
Source: Lockheed Martin
It currently makes up around 19% of total sales.
Lockheed can claim some impressive numbers for its space division:
- 8 planets visited by Lockheed Martin spacecraft.
- 1,000,000+ hours of planetary spacecraft operations.
- 300+ mission payloads built for customers.
As launch costs are declining extremely quickly from reusable rockets pioneered by SpaceX, this is a segment that might experience quick growth in the coming decade, including from permanent bases on the Moon, but also the potential of space-based solar power, other space infrastructures, or even human landings on Mars.
Lockheed Martin’s Financials
Lockheed had $67B in sales in 2023, and is on track to keep it up with a $17.1B in Q3 2024. The company has been rather consistently generating 10-12%+ of its sales in operating profit and free cash flow.
It distributed a dividend with a yield of around 2.4% in November 2024, to which should be added a slightly higher amount in share repurchases.
As most of the company’s revenues are tied to very long-term purchases and service contracts with the US military, this has historically created a steady and profitable business.
This led the company to be a favorite among conservative investors, looking for slowly growing and stable cash flow and dividends.
Ultimately, an investment in Lockheed Martin is a bet in continuous military spending by the US government, as well as its allies.
This could however be an issue as well, as the US government debt has been skyrocketing in recent years, to maybe unsustainable levels. And the prices & performance of the weapon systems developed by Lockheed and other US defense giants are getting increasingly criticized.
The F-35 Controversy
The flagship of Lockheed’s aircraft business, the F-35 fighter-bomber jet, has been suffering since day 1 from a very troubled development.
The program has suffered from severe technical shortcomings, massive cost overruns, and has been described by some as a “debacle”.
And even if more than 20 countries are partners of the US (with Romania the latest added in 2024) on the program, some of the criticisms are justified. For example, even today, almost 20 years later, barely half of the F-35 are mission-capable at any given time.
This did not however impact Lockheed’s profits, with sales of F-35 going well, as well as lucrative (overpriced?) maintenance contracts.
Pentagon officials awarded Lockheed Martin up to $6.6 billion in 2021 to support the F-35 fleet for two years, through 2023. These contracts will grow even larger as more aircraft are delivered.
Project On Government Oversight
Elon Musk Intervention?
This sort of underperformance by big defense firms has become a little too common recently. An even worse example is Boeing, which has recently failed to produce safe civilian airplanes or functioning space capsules.
In the case of Boeing, this has been magnified by the comparative success of Elon Musk’s SpaceX.
This could become an issue for Lockheed Martin as well, as Musk is going to be appointed by Trump to lead the government efficiency department.
The F-35 might be a priority target for Musk if we believe a recent tweet comparing drone swarm to “some idiots still building manned fighter jets like the F-35”. In the same thread, Musk said trash the F-35 design and approved “100% that drones are the new level of warfare”.
Source: Elon Musk
This must be raising a few eyebrows coming from the man essentially charged to hack through government spending with a hatchet. So overall, investors might have to take such comments into consideration before assuming that a Republican presidency will be good for defense stocks.
Future Of Military Systems
It is relatively common knowledge that too many technology and weapons systems in the Western defense industry are “gold-plated”. This indicates not so much an inability to do the tasks, than a too-high price tag created by very complex solutions.
This stands in stark contrast to the philosophy behind previous generations of weapons, which had to be sufficiently rugged and simple to be mass-produced at a cheap cost, even if with fewer capabilities.
It is likely that the pendulum will swing back, at least for a little, toward that direction.
In the short term, this could be a problem for companies like Lockheed, which have invested a lot in very advanced systems.
But in the long run, the manufacturing facilities, the experience of its personnel, and the engineering capability of Lockheed are likely to be able to adapt to new procurement standards and new military requirements.
Lockheed Martin Innovations
While the (too?) complex system of the F-35 has underperformed, Lockheed is nevertheless are the forefront of innovation in space and military technology. With great power competition eating up between the West and Eurasian powers, this is likely to pay off for the company’s many programs in development.
Hypersonic Weapons
A key to maintaining deterrence, especially nuclear deterrence, is maintaining the MAD (Mutually Assured Destruction) balance of power.
Hypersonic weapons are able to fly at Mach 10 or more (12,000km/h or 7,600 miles/hours), making them virtually impossible to intercept.
It seems that currently, the Russian and Chinese military are one step ahead of the US in this field. This has created a massive sense of urgency, with Lockheed tasked to lead the catch-up through a $756M award to develop the Long Range Hypersonic Weapon (LRHW). The company is also working on the Hypersonic Air-Launched Offensive Anti-Surface Warfare (HALO), Air-Launched Rapid Response Weapon (ARRW), and the Conventional Prompt Strike (CPS).
Source: Lockheed Martin
This is a program likely to pay off beyond the weapons themselves, as it requires the development of new materials resistant to extreme heat and advanced guidance and communication systems. These technologies and associated IPs are likely to become extremely valuable IPs in the future, including for space and civilian applications.
Cyberdefense, Integrated Command & AI
Electronic data are becoming a very important part of military operations, not only including target data but also requiring very sturdy real-time communications, instant assessment of threats, automatic defenses, etc.
This is before taking drones and autonomous weapons into account (see below).
For example, Lockheed has its own “AI factory” to churn out digital and AI solutions for the military, including unified 5G networks. It also offers cyberdefense and cyberoffense solutions, a sector increasingly seen as a new military “domain”, alongside land, sea, air, and space.
Drone & Autonomous Weapons
The war in Ukraine has demonstrated the quickly growing importance of drones and unmanned systems, especially in the air.
This could completely redefine the role of manned aircraft, turning them more into a central command platform for drones than a lone attack platform. This is the key element behind the concept of “crewed-uncrewed teaming”, optimizing the performance of both man and unmanned systems.
Source: Lockheed Martin
This concept could also be the salvation of the F-35, as it has been designed from inception to be a command platform with very high computing capacity.
Lockheed has recently demonstrated this concept and its ability to deploy an AI-controlled aircraft, with targets assigned by a nearby pilot.
Lockheed also tested its first autonomous Black Hawk flight in 2022, which could be in the future replaced by the RaiderX helicopter concept.
Source: Lockheed Martin
Energy Weapon & Electronic Warfare
As drones and ultra-cheap weapons systems become omnipresent on modern battlefields, conventional air defenses are insufficient. This is because using an expensive missile to shoot a much cheaper drone is a losing proposition in the long run.
It has become a very serious issue for all modern military forces, with smaller adversaries able to quickly deplete expensive missile-based air defense, like seen for US warships over the Yemeni coasts.
The cost of using expensive naval missiles — which can run up to $2.1 million a shot — to destroy unsophisticated Houthi drones — estimated at a few thousand dollars each — is a growing concern.
Experts also point out that destroyers are limited in how many missiles they can shoot before needing to return to a U.S. weapons pier to reload, and each ship contains 90 or more missile tubes.
Politico – A $2M missile vs. a $2,000 drone: Pentagon worried over cost of Houthi attacks
Electronic warfare could be an answer. It utilizes only electricity to either cut the connection of a drone with its pilot, or even directly fry the electronic components with directed microwaves.
Energy weapons, mostly lasers, could also be used and mounted on vehicles, ships, or airplanes.
New Weapons
Lockheed Martin is also in charge of developing some of the next generation of weapons for the US military, with a strong presence on a few key systems:
Conclusion
Lockheed Martin is the keystone of American and NATO air power. And despite the mixed results of the likely too-ambitious F-35 program, it is still at the center of all the key capacities that will be needed in future conflicts: missile and drone defense, cyber warfare, integrated digital command, unmanned aircraft, space capability, hypersonic missiles, and ICBM.
So even if Elon Musk comes for some of Lockheed’s revenue streams, the company is not going anywhere and will stay a prime military supplier.
As long as America and NATO can maintain their current military budget, this is likely an investment that will have limited downside and could provide significant gains to investors in case of escalating conflict in Europe, the Middle East, and East Asia.
Besides questions of military budgets, the expertise of Lockheed in building satellites and space probes might pay off greatly as a new space race is heating up. It could become an important supplier of space habitats, equipment for mining the Moon or asteroids, as well as building the infrastructure required for space tourism and the beginning of actual space colonization.