Different market environments and economic climates create unique sets of winners and losers. Currently, the market is facing dual challenges with stubbornly high inflation and concerns of an economic slowdown that could be exacerbated by a hawkish Federal Reserve.
This environment is bearish for growth and cyclical stocks. It certainly leads to more of a 'stockpickers' market'. However, one group that does tend to outperform with such conditions, is aerospace & defense stocks. These companies have very stable revenues based on long-term contracts. They also have decent inflation protection given their pricing power and lack of competition. Their large balance sheet is a fortress of safety if economic conditions do deteriorate. Among defense stocks, Lockheed Martin (NYSE: LMT) is one of the top names.
The stock is one of the leading providers of fighter jets and other weapons systems, but it has other divisions in terms of services like IT and cybersecurity and a small but fast-growing space division. It's also been an outperformer with a YTD gain of 25%, while the S&P 500 (NYSE: SPY) is down more than 10%.
Inside the Numbers
Lockheed Martin shares were slightly lower following its Q1 earnings report which showed the company with revenue of $15 billion and a net profit of $1.7 billion a share which equates to $6.44 per share. Compared to 2021's Q1, this is a 10% decline on the top line and a 4% drop for the bottom line.
The company attributed the miss to impact of the omicron variant which led to a delay in the closing of some contracts. It also did see some impact from supply chain issues which led to lower production of certain items.
However, the company did reaffirm its full-year guidance as it sees earnings and revenue pick up in the second half of the year. It also sees defense spending increasing on a global basis due to the conflict. After the war began, Canada committed to buying 88 F-35s and German is buying 35.
The company's Javelin weapon has been particularly useful in Ukraine against Russian tanks which have led to talks with the Pentagon about increasing production. Due to this success, there has been interest from other Eastern European nations looking to bolster their defenses as well.
Another catalyst is that with geopolitical tensions ratcheting up and the increasingly modern nature of warfare. Air supremacy is the major factor, and the war in cyberspace is another important frontier. Lockheed is at the leading edge of both of these areas and should benefit in the long term despite its setback as countries all over the world are likely to increase defense spending.