Bank of America downgraded the stock of Lockheed Martin (LMT) - Get Lockheed Martin Corporation Report to neutral from buy Monday and cut its price target to $375 from $440 on concern about the defense contractor's shifting business model.
Last week, Lockheed Martin forecast a decline in sales growth by about $1 billion in 2022 to $66 billion, analyst Ronald Epstein wrote.
“While growth is presumed to grow steadily thereafter, this was not well received, as the story does not fit the broader narrative,” he said.
“The defense budget is not declining, and LMT is not overly exposed to the Army (the presumed bill payer in the Pacific pivot).
"Instead, it seems the company rode the wave of the F-35, which has now plateaued, to the detriment of the rest of its portfolio.
“By the nature of its business, LMT will continue to generate strong free cash flow which will enable a shareholder-friendly cash deployment strategy.
“However, this is a fairly-quick pivot in strategy, away from the initial focus on inorganic growth via tech-related M&A to significant share repurchases since current management took the reins.”
Lockheed Martin stock on Monday closed at $330.93, down 0.4%. It had dropped 11% in the past week, as investors mulled its earnings report last Tuesday.
Morningstar analyst Huey Burkett cut his fair value for LMT stock to $402 from $425 after the report.
“We don’t like the unexpected shift in priorities and think this shift may be indicative of difficulties in achieving [Chief Executive] Jim Taiclet’s long-term vision of applying telecom-style connectivity to military procurement,” he wrote.