Lockheed Martin's Mixed Performance: Is This Aerospace Giant a Buy for 2026?

The aerospace and defense sector has long been a cornerstone of global industrial might, but few companies embody its complexities as vividly as Lockheed Martin. In the third quarter of 2025, the firm reported a 9% year-over-year revenue increase to $18.6 billion, driven by robust demand for its F-35 fighter jets and major contract wins such as the CH-53K helicopter and PAC-3 MSE missile programs. These short-term gains, coupled with a record $179 billion backlog, suggest a company in strong operational health. Yet, over the past five years, Lockheed Martin's stock has underperformed the S&P 500 by a significant margin, delivering a total return of 56.32% compared to the index's 189%. This divergence raises a critical question: Is the current valuation of Lockheed Martin, trading at a 25.6x price-to-earnings (P/E) ratio, a compelling opportunity or a cautionary tale of misplaced optimism?

Short-Term Gains: A Fortress of Cash and Contracts

Lockheed Martin's recent financial results underscore its dominance in defense procurement. The F-35 program alone delivered 143 jets in the first three quarters of 2025, a testament to its role as the U.S. military's fifth-generation fighter backbone. Meanwhile, the company's free cash flow of $3.3 billion in Q3 2025 enabled a $1.8 billion return to shareholders through dividends and buybacks, including a 5% dividend hike. These metrics reflect a business model that thrives on long-term government contracts, where cash flow stability often outweighs short-term volatility.

The company's $179 billion backlog, a 6% increase from March 2025, further reinforces its near-term visibility. This backlog is not merely a function of volume but also of strategic alignment with global defense priorities. For instance, the $10.9 billion CH-53K helicopter deal and the $9.8 billion PAC-3 MSE order are tied to modernization efforts in the U.S. Army and Air Force, sectors expected to grow as geopolitical tensions persist.

Long-Term Underperformance: A Tale of Market Realities

Despite these strengths, Lockheed Martin's stock has lagged its peers and the broader market over the past five years. As of December 2025, its 5-year compound annual growth rate (CAGR) of 6.67% pales in comparison to the S&P 500's 189% total return according to data. This underperformance is partly attributable to structural challenges within the defense sector. Unlike technology or consumer discretionary stocks, defense contractors are often viewed as "bond proxies" due to their predictable cash flows but limited growth potential. Investors have increasingly favored sectors with higher earnings multiples, such as AI-driven tech firms, leaving defense stocks like Lockheed Martin in the shadows.

Moreover, the company's P/E ratio has risen sharply, from 16.37 (forward) to 26.96 (trailing) as of December 2025, reflecting heightened expectations for future earnings. However, this optimism is tempered by operational headwinds. In Q2 2025, Lockheed Martin reported $1.6 billion in program losses and $169 million in other charges, primarily due to cost overruns and workforce shortages. These challenges, combined with geopolitical uncertainties-such as shifting defense budgets in Europe and Asia-have dampened long-term investor confidence.

Valuation Potential: Undervalued or Overlooked?

The key to assessing Lockheed Martin's investment potential lies in reconciling its short-term resilience with long-term risks. Analysts argue that the company is currently undervalued by 25.7% to 27.5% based on discounted cash flow (DCF) models. Its P/E ratio of 25.6x is below the Aerospace and Defense industry average according to market data, suggesting that the market is not fully pricing in its robust backlog or technological edge. For example, Lockheed Martin's investments in hypersonic weapons and AI-driven simulation systems align with Pentagon priorities, including the Joint All-Domain Command and Control (JADC2) program. These initiatives, coupled with a $68.5 billion contract win in 2025, position the company to benefit from a projected 12% annual growth in hypersonic spending through 2030.

However, the valuation discount also reflects legitimate concerns. The company's reliance on government contracts exposes it to budgetary fluctuations and political risks. For instance, delays in the F-35 program or reduced defense spending under a new administration could erode margins. Additionally, workforce shortages in critical engineering and manufacturing roles remain a persistent challenge.

Conclusion: A Calculated Bet for 2026

Lockheed Martin's mixed performance presents a paradox for investors: a company with unparalleled access to long-term government contracts and cutting-edge technology, yet trading at a discount to its peers. The short-term gains-bolstered by a $179 billion backlog and strong cash flow-suggest a resilient business model. However, the long-term underperformance highlights the sector's structural limitations and the market's preference for higher-growth assets.

For 2026, the decision to invest hinges on one's risk tolerance and time horizon. Conservative investors may view the current valuation as a compelling entry point, particularly if defense budgets remain robust and geopolitical tensions persist. Aggressive investors, however, might prefer to wait for clearer signs of margin expansion or a more favorable P/E multiple. In the end, Lockheed Martin's story is one of strategic endurance rather than explosive growth-a reminder that in the aerospace sector, stability often comes at the cost of dynamism.