Lockheed Scores Blockbuster $24 Billion Sale of 296 F-35s

Lockheed Martin recently secured a significant $24.3 billion contract for 296 F-35 fighter jets, achieving an average unit cost of $82 million, a substantial reduction from prior prices and a fulfillment of long-term cost-efficiency targets. Despite this increased sales volume, Lockheed's aeronautics division has experienced a notable decline in profit margins, falling from 10.4% to 4.2% in H1 2025, partly due to a classified program loss but also impacted by the lower F-35 pricing. This margin compression, combined with the stock's current valuation at 28.5 times trailing earnings against a modest 12% estimated growth rate, raises concerns about its investment appeal despite the F-35 program's success.

Analysis

Lockheed Martin secured a substantial $24.3 billion contract for 296 F-35 fighter jets, achieving an average unit cost of $82 million per aircraft. This represents a significant 25% cost reduction from prior years, fulfilling the company's long-term projection for F-35 affordability through economies of scale. Increased F-35 volumes are driving aeronautics division revenue growth, projected at $29 billion for 2025.

Despite robust revenue, Lockheed's aeronautics division has experienced significant operating profit margin compression, falling from an average of 10.4% (2021-2023) to 8.6% in 2024, and further to a mere 4.2% in H1 2025. This decline is partly attributed to a $950 million loss on a classified program within the segment, but also reflects the impact of lower F-35 unit pricing.

The F-35 margins were insufficient to absorb the classified program's losses, highlighting a challenge in maintaining profitability despite volume growth. The stock's current valuation, trading at 28.5 times trailing earnings against an estimated long-term earnings growth rate of only 12%, results in a PEG ratio exceeding 2.0.

This high valuation, coupled with margin pressures, leads to a cautious investment outlook. The analyst refrains from a "buy" recommendation until the stock's valuation becomes more attractive, despite the F-35 program's success in meeting cost targets.

Key Decisions for Investors

• Closely monitor Lockheed Martin's aeronautics division operating profit margins for signs of recovery from the classified program loss and stabilization of F-35 profitability.
• Evaluate the current valuation of 28.5x trailing P/E against the 12% estimated long-term growth rate, considering if the premium is justified amid margin pressures.
• Assess the long-term earnings growth potential, specifically how increased F-35 volumes will translate into improved overall profitability given the lower unit prices.