Defense Giants Under the Spotlight: What Investors Need to Know from Q2 2025 Earnings Reports

The defense sector is bracing for a critical week as Raytheon Technologies (RTX), Lockheed Martin (LMT), and Northrop Grumman (NOC) release their Q2 2025 earnings reports. With global defense spending at record highs and geopolitical tensions fueling demand for advanced systems, investors will scrutinize these companies’ financial health, execution risks, and strategic priorities. Here’s what to watch for—and why it matters for investors.

Raytheon Technologies (RTX): Backlog Strength vs. Margin Pressures

RTX enters the earnings season with a $218 billion backlog, a record high fueled by defense modernization and commercial aerospace recovery. The company’s 2025 outlook targets $83–84 billion in sales and $6.00–6.15 EPS, up from $5.73 in 2024. Key drivers include:
- Collins Aerospace: Commercial aftermarket growth and defense programs like the Global Patriot missile system.
- Pratt & Whitney: Strong demand for F135 engines (used in F-35 fighters) and large commercial engines.
- Free Cash Flow: A $7.0–7.5 billion target reflects confidence in operational efficiency.

But challenges linger. RTX’s ROE of 2.44% trails peers like Northrop (8.42%), signaling underwhelming capital efficiency. Investors will monitor management’s plans to improve margins while executing on its massive backlog.

Lockheed Martin (LMT): Navigating Classified Program Losses

Lockheed’s Q2 results will face scrutiny over its $2.0 billion in classified program losses in 2024, which dragged down full-year EPS by $6.16. The company’s 2025 outlook includes $73.75–74.75 billion in sales and $27.00–27.30 EPS, but these targets hinge on resolving technical hurdles in fixed-price contracts.

Key focus areas:
- Aeronautics Segment: Progress on the F-35 Lightning II and 6th-generation fighter programs.
- Debt Management: The company’s debt-to-equity ratio of 3.2 remains a red flag, though free cash flow targets ($6.6–6.8 billion) aim to stabilize this.
- Shareholder Returns: A $4.5 billion buyback in 2024 underscores commitment to capital returns, but investors will demand clarity on cost discipline.

Northrop Grumman (NOC): Steady Profits, Modest Growth

Northrop’s Q4 2024 EPS of $6.39 beat estimates, but its 0.45% revenue growth highlights challenges in scaling operations. The company’s strengths lie in:
- High ROE (8.42%) and $1.93 billion gross profit, the best among peers.
- Diversified portfolio: Leadership in missile defense (e.g., Terminal High Altitude Area Defense (THAAD) systems) and space systems.
- Capital returns: A $3 billion buyback authorization and steady dividend ($2.35 quarterly) signal confidence in cash flow.

Risks: Reliance on U.S. government contracts and slower revenue growth compared to rivals like RTX (8.5% growth).

Key Takeaways for Investors

1. Defense Demand Remains Robust: All three companies benefit from U.S. defense spending of $816 billion in 2024, with hypersonics, AI, and cyber resilience driving innovation.
2. Execution Risks: Lockheed’s classified program losses and RTX’s margin struggles highlight the sector’s complexity.
3. Valuation Considerations:
4. RTX: Trading at 18.7x 2025 EPS estimates, it offers growth but faces margin hurdles.
5. Northrop: At 20.2x 2025 estimates, its profitability and stability make it a safer bet.
6. Lockheed: At 17.2x 2025 estimates, it’s cheap but risky due to execution concerns.

Conclusion

The defense sector’s Q2 earnings will test whether these giants can turn record backlogs into sustained profitability. Northrop Grumman stands out for its strong ROE and disciplined capital returns, while RTX’s backlog and innovation pipeline position it for long-term growth. Lockheed, however, must prove it can resolve costly technical issues to justify its valuation.

Investors should prioritize companies with diversified revenue streams, manageable debt, and clear margin improvement plans. With geopolitical risks and defense spending trends favoring the sector, the companies that balance execution with innovation will lead the pack.

Final Verdict: Northrop’s stability and RTX’s growth potential make them the sector’s top picks, but investors must remain cautious on Lockheed’s ability to deliver consistent results.