LOCKHEED MARTIN CORP (LMT) stock intrinsic value fair value estimate & owner earnings analysis

Lockheed Martin is the world's largest defense contractor, organized into four segments: Aeronautics (the F-35 fighter, about 27% of 2025 sales, plus classified programs), Missiles and Fire Control (Patriot/PAC-3, THAAD, HIMARS, JASSM, LRASM and other munitions), Rotary and Mission Systems (Sikorsky helicopters, Aegis combat systems, naval systems), and Space (GPS III, missile warning, national security space). Roughly three-quarters of revenue comes from the U.S. government, with most of the remainder from allied foreign militaries buying the same systems. The company carries a backlog of $193.6 billion (versus $75.0 billion of 2025 revenue), giving unusually long revenue visibility for an industrial company. How we measured the cash the business actually throws off. We built our estimate of sustainable owner earnings from ten years of cash-flow statements (2016-2025): operating cash flow, less the swings in receivables/contract assets/inventories/payables/contract liabilities that come from the timing of very long production contracts, less stock-based compensation, less the portion of capital spending needed just to sustain the current business (as opposed to spending to grow it). One year, 2018, we excluded from our anchor: that year the company made an unusually large, one-time voluntary contribution to its pension plan, which mechanically depressed operating cash flow by roughly $3.6 billion and is not representative of a normal year. Excluding that year, the resulting per-share figure has ranged from about $17 to $31 a share over the last decade with a generally rising trend, and the middle (median) year came in at about $22.50 a share. We used that median, rather than the most recent (stronger) year, as the anchor for what the business durably earns, to avoid building the valuation on a single good year. A note on pension accounting, because it matters for this company specifically: Lockheed's reported net income includes a non-cash pension accounting adjustment that can swing profit up or down by over a billion dollars a year without any cash changing hands, because U.S. GAAP pension expense and the pension cost the government actually reimburses through contract pricing are calculated differently. We avoided this distortion entirely by building our estimate from actual cash flow (which reflects real cash contributions to the pension plan) rather than from reported net income. We checked, year by year, that the gap between net income plus non-cash charges and our cash-based figure was fully explained by this pension-funding difference, and it was in every year we examined -- most dramatically in 2018, the year we excluded. The main risk we found in the filings, and the one that most shapes our bear case: Lockheed has recorded a series of cost overruns on fixed-price development contracts in recent years -- $950 million in 2025 and $555 million in 2024 on an ongoing classified Aeronautics program, $1.4 billion in 2024 on a classified Missiles and Fire Control program, and smaller overruns on two helicopter programs (the Canadian Maritime Helicopter Program and TUHP) in 2025. Management states it continues to monitor the classified Aeronautics program and may need to record additional losses. Separately, the U.S. Air Force's 2024 down-select for its next-generation fighter ("NGAD") went to a competitor, not Lockheed, which caps -- though does not eliminate -- what replaces F-35 production revenue once that program eventually winds down in favor of a next-generation aircraft; Lockheed still has decades of F-35 production and even longer decades of sustainment revenue ahead of it, plus a role to play in components and subsystems for whatever comes next, but it will not be the prime integrator on the successor fighter. Our base case assumes the business continues on roughly its recent trajectory: mid-single-digit revenue growth from a large and growing backlog, continued strength in munitions given the current global replenishment cycle, and the company continuing to shrink its share count through buybacks as it has for a decade. That produces per-share owner earnings growing at about 7% a year for five years, moderating to about 5% a year for the next five, reaching roughly $40 a share in year ten. Beyond that we assumed the business settles into something close to a steady state -- F-35 production eventually gives way to a very long sustainment tail, munitions and space continue at a durable level, and modest price escalation on long government contracts supports a small amount of continued growth. On that basis we estimate the shares are worth around $641 today. We note that this far-future period ("the tail") accounts for roughly two-thirds of that total value, which is common for a business with multi-decade government contracts, but it does mean the estimate leans heavily on our view that Lockheed's relationship with the U.S. government and its allies endures in something like its current form. Our bear case assumes U.S. defense budget growth stalls amid fiscal pressure, the classified-program cost overruns continue for another two to three years and spread to additional fixed-price contracts, F-35 production rates are trimmed, and margins compress by roughly a percentage point company-wide -- with no successor fighter program to offset a gradual Aeronautics decline once F-35 production eventually tapers, given the lost NGAD competition. That produces declining owner earnings for the next several years before stabilizing at a lower, flat sustainment-driven level. On that basis the shares would be worth around $336. Our bull case assumes sustained, elevated global defense spending -- NATO allies moving toward higher spending targets, continued high-volume munitions replenishment, and strong international F-35 demand -- combined with the classified-program issues being resolved without further losses and Lockheed securing a meaningful subsystem or integration role in next-generation defense programs even without being the prime contractor. On that basis the shares would be worth around $876. Given the spread between our bear and base cases, the margin-of-safety price is around $436 a share, and it assumes the classified-program cost overruns stabilize -- no new material charge for a couple of consecutive quarters. We did not find any going-concern, delisting, or similar disqualifying issues, and Lockheed is not Chinese-controlled, cannabis-related, or crypto-related.