• Investors may be wondering if Lockheed Martin stock is offering fair value at around US$512, or if the current price is missing part of the story.
• Over the past week the share price declined 3.6%, was down 1.2% over the last 30 days, but is still up 3.0% year to date and 9.0% over the past year, with gains of 20.2% over three years and 51.5% over five years.
• Recent headlines have focused on Lockheed Martin's role in major defense programs and contract awards, as governments continue to spend heavily on security and defense capabilities. This context provides one explanation for why the stock has shown both periods of weakness in the short term and positive returns over longer time frames.
• On Simply Wall St's valuation framework, Lockheed Martin scores a perfect 6 out of 6 on undervaluation checks. This sets up a closer look at how different valuation methods stack up for this stock and points to a more complete way to think about value at the end of the article.

Approach 1: Lockheed Martin Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a stock could be worth by projecting the cash the company may generate in the future and discounting those cash flows back to today’s value.

For Lockheed Martin, the model used is a 2 Stage Free Cash Flow to Equity approach. The latest twelve month free cash flow is about $5.6b. Analyst and extrapolated projections have free cash flow reaching $8.5b by 2030, with a series of annual estimates and extensions in between. Simply Wall St uses analyst inputs where available, then extrapolates further years to build a 10 year cash flow path in dollars and discounts each of those years back to the present.

On this basis, the DCF model points to an estimated intrinsic value of about $709.37 per share for Lockheed Martin. Against a recent share price around $512, the model implies the stock is trading at roughly a 27.8% discount to this intrinsic estimate. This indicates the shares may be undervalued on these cash flow assumptions.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Lockheed Martin is undervalued by 27.8%. Track this in your watchlist or portfolio, or discover 47 more high quality undervalued stocks.

Approach 2: Lockheed Martin Price vs Earnings

For a profitable company, the P/E ratio is a useful way to think about value because it links what you pay for each share to the earnings that support that price. A higher or lower P/E often reflects what the market is willing to pay based on growth expectations and perceived risk, with higher expected growth or lower risk often supporting a higher “normal” P/E.

Lockheed Martin currently trades on a P/E of 24.63x. This is below the Aerospace & Defense industry average P/E of 40.03x and below the peer group average of 45.18x. Simply Wall St also calculates a “Fair Ratio” of 34.24x for Lockheed Martin. This proprietary metric estimates what the P/E could be after accounting for factors such as the company’s earnings growth profile, its industry, profit margins, market cap and specific risks.

Because the Fair Ratio is tailored to Lockheed Martin, it can give a more tailored signal than broad industry or peer comparisons that may include companies with very different risk and growth characteristics. Comparing the Fair Ratio of 34.24x with the current P/E of 24.63x suggests the stock may be undervalued on this earnings based yardstick.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Lockheed Martin Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives are introduced here as simple stories you build around your own fair value, revenue, earnings and margin assumptions for Lockheed Martin. They link what you believe about the business to a financial forecast and then to a fair value that can be compared directly with the current share price to help decide whether the stock looks attractive or stretched.

On Simply Wall St, Narratives sit inside the Community page and are designed so any investor can use them. The platform updates them automatically when new news, earnings or guidance is added, so your story and fair value estimate stay current without extra work.

Looking at Lockheed Martin, one investor Narrative on the platform currently anchors to a fair value around US$566.77. A more optimistic Narrative points to about US$866.67. That spread neatly shows how two people can look at the same company, weigh the same contracts, programs and risks differently, and still use the same tool to translate those views into numbers they can track against today’s price over time.

Do you think there's more to the story for Lockheed Martin? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.