Lockheed Martin: A Contrarian Play on Defense Innovation Amid F-35 Headwinds

The Pentagon's recent decision to slash F-35 procurement requests by nearly 50% for fiscal year 2026 has sent Lockheed Martin's (LMT) stock reeling. Yet beneath the noise of short-term uncertainty lies a compelling opportunity for contrarian investors. With a robust dividend yield, an undervalued PEG ratio relative to peers, and a global backlog of orders, LMT's fundamentals suggest this pullback is a buying opportunity for those willing to look past the headlines.

The F-35 Cut: Overreaction or Opportunity?
The Pentagon's reduction of Air Force F-35A orders from 48 to 24 jets for FY2026—and similar cuts across naval and Marine variants—has been framed as a death knell for Lockheed's flagship program. However, the reality is more nuanced. The cuts stem from delays in the F-35's Technology Refresh 3 (TR-3) software upgrades, which have stranded jets at production facilities and prompted Congress to withhold acceptance of 20 planes until fixes are verified. While this has caused a 6% stock dip, the issue is temporary:

1. Pent-Up Demand: The backlog of undelivered jets—combined with a $176 billion international order book—creates a “rebound” scenario once TR-3 is resolved. Analysts estimate deliveries could surge to 170–190 jets annually by late 2025.
2. Budget Reallocation, Not Cancellation: The cuts are part of a broader Pentagon strategy to shift funds toward hypersonic weapons and the B-21 bomber, not abandon the F-35. Defense Secretary Pete Hegseth's 8% spending reduction over five years applies to all programs, sparing the F-35's role as a cornerstone of U.S. and NATO air superiority.

The Contrarian Case: Dividends, Valuation, and Global Demand
The market's reaction has created a disconnect between LMT's fundamentals and its price:

1. Dividend Resilience

Lockheed's dividend yield of 2.86% (vs. a 0.66% sector average) reflects its cash flow stability. While peers like Northrop Grumman (NOC, 1.74%) and Raytheon (RTX, 1.81%) lag, LMT's payout ratio of 45% ensures growth reinvestment without overextending.

2. Undervalued PEG Ratio

LMT's PEG ratio of 1.67 falls below the Aerospace & Defense sector's average of 2.12, suggesting it's priced for slower growth than it deserves. While RTX trades at a PEG of 2.5 and NOC at 1.9, LMT's valuation accounts for TR-3 delays but overlooks its long-term advantages:

• Block 4 Upgrades: Once TR-3 is resolved, the F-35's Block 4 iteration will introduce hypersonic missile compatibility and advanced AI, solidifying its edge over rivals like Sweden's Gripen E.
• International Momentum: Orders from key allies—138 jets from the UK (pending cost negotiations), 90 from Italy, and 72 from Australia—account for ~45% of F-35 demand. This diversification shields LMT from U.S. budget volatility.

3. Sector-Specific Catalysts

• Defense Budget Reconciliation: If Congress approves Trump's $51 billion FY2026 procurement boost, F-35 orders could rebound faster than expected.
• Global Tensions: Rising Indo-Pacific and European conflicts are accelerating demand for fifth-gen fighters. NATO's 2030 airpower goals alone could require 1,500+ F-35s, with LMT as the sole U.S. supplier.

Risks and Mitigants
- TR-3 Delays Beyond 2026: A prolonged software crisis could strain margins. However, Lockheed's $350 million software overhaul and Congress's five-year oversight plan reduce this risk.
- Geopolitical Volatility: Turkey's expulsion from the F-35 program and U.S.-Europe trade disputes pose headwinds, but LMT's focus on NATO-aligned buyers limits exposure.

Investment Thesis
Lockheed Martin's current valuation presents a rare contrarian entry point. The F-35's strategic importance, international order backlog, and dividend resilience position LMT to rebound sharply once TR-3 is resolved. While near-term earnings may face headwinds, the stock's 17.5x forward P/E and 2.86% yield offer a margin of safety.

Recommendation:
- Buy on dips below $240/share, with a $300 price target by 2026 if TR-3 milestones are met.
- Hold for the long term: LMT's global footprint and $173 billion backlog ensure relevance through 2030+ even if U.S. procurement stays muted.

In a sector where hypersonic weapons and AI dominate headlines, LMT's F-35 program remains unmatched in execution and demand. For investors willing to endure short-term turbulence, this is a chance to buy a defense giant at a discount.

Disclosure: This article is for informational purposes only and not a recommendation to buy or sell securities.