Lockheed Martin's Backlog Is Soaring: Time to Buy the Stock

Lockheed Martin's order backlog has expanded significantly, reaching $292 billion in the third quarter from $194 billion at the beginning of the year. Rather than merely focusing on the quantity of this increase, the quality of the backlog also merits attention. This is a positive sign for investors considering buying the stock.

The table provided outlines how each segment of Lockheed Martin's business has seen an increase in backlog through 2026, with one notable area being the missiles and fire control (MFC) segment. This segment's growing backlog suggests that the company's profit margins will improve as this backlog converts into revenue. Additionally, the MFC backlog's growth implies a reduction in overall risk, a crucial factor given the challenges defense companies often face in delivering complex fixed-price contracts for the Department of Defense.

These contracts have led to multibillion-dollar charges and losses for defense firms, as well as strained relationships highlighted by the presidential executive order from January aimed at identifying underperforming contractors. Lockheed Martin, however, has managed to address these concerns. Chief Financial Officer Evan Scott pointed out that the PAC-3 seven-year contract, valued at up to $58.6 billion, was a significant contributor in the quarter.

The PAC-3 system is a mature technology, thus carrying less development risk compared to brand new programs. Moreover, the company appears to be part of a trend in defense contracting toward more mutually beneficial long-term agreements. These agreements, which include long-term durations, fixed-price escalators, cash flow neutrality, and cancellation protections, provide a recovery mechanism for Lockheed Martin and protect against potential reductions in orders by future administrations.

Despite the persisting execution risks, these improvements in Lockheed's prospects make the company an attractive buy for defense-focused investors. Currently, Lockheed Martin trades at 22 times earnings and 18.6 times free cash flow expectations for 2026, suggesting it could be a good value in the current market.