Lockheed Martin (LMT)

Total return at 5 years: 13.8%/year = 11.2% appreciation + 2.5% dividend. The target price ($871) is ex-dividend; the $80 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $920 · Multiples $769) exceeds the market price ($512).

Today — fairly valued: at $512 trades ~33.4% below its value discounted to today (~$769); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — Infravalorado: the target price ($871) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$486.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($512) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-5.2%/year) than we project (6.4%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$5.9 bn of owner earnings in year 5 (vs ~$10.6 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/EBIT (contratista de defensa). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: the base year is the real TTM for revenue/EBIT/net income to Jun-2026 (XBRL); the cash cascade inputs (FCF $8.73bn, buyback $1.75bn) are from the same twelve months to Jun 28, 2026. Lockheed Martin is valued on EV/EBIT: a long-cycle defense contractor, with multi-year fixed-price/cost-reimbursable contracts with the US government (72% of sales) and allies. The TTM operating margin (~11.9%) is recovering from the one-off 'reach-forward' losses on classified programs that hit FY2024 (~$2.0bn) and FY2025 (~$1.5bn net) —catch-ups already recognized on fixed-price contracts, not a structural trend— and converges toward, without exceeding, the historical ~12.6% (FY22-23) by year 5. The exit multiple (16× base, within the 15-22× aerospace band) is above today's EV/EBIT — §2 discipline in reverse: the market is penalizing Lockheed Martin below its own archetype for the reach-forward losses, and the base case only asks for a disciplined reversion toward the band, not an unprecedented expansion. Buybacks (historically decelerating, from $7.9bn in FY22 to $1.75bn TTM, with $8.3bn of authorization remaining) are modeled explicitly in the share path; cash does not accumulate: dividends and buybacks consume ~56% of real FCF for the trailing year and the rest is not retained as cash (it fell from $4.1bn to $3.79bn in the first half of 2026), so the excess is treated as redeployed and adds no value through accumulation. Watch: further reach-forward losses on other fixed-price contracts, and the pace of the US defense budget.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $871 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $512, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $871 in 5 years plus $80 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $769. Against the current market price ($512), the margin of safety is 33.4% (trades below the maximum → there is margin) and the total return at that price would be 13.8% annually.

• Multiple vs the sector. EV/EBIT ~15× — below the floor of the aerospace band (15-22x).
• The archetype band. Exit multiple 16x — low end of the band (15-22x); a modest reversion from today's 15×, without crediting the full re-rating (structural fixed-price risk justifies it).
• Margin of safety. 5-year base ~$871 vs price ~$512 → +14%/year: Undervalued.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (121%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC vs the 10% bar. ~32% (NOPAT/invested capital, with book equity kept low by years of buybacks and a negative pension AOCI) — well above the bar.
• Cash quality. CFROIC (~38.9%) exceeds ROIC (~32%): maintenance capital expenditure runs in line with depreciation and amortization, with no material growth capital expenditure, and working capital freed up cash in the period — largely the F-35 Lot 18/19 customer advances — a transitory tailwind rather than a sustainable pattern. Earnings are backed by cash.
• Balance sheet. Book equity very low ($6.7bn) due to accumulated buybacks + pension other comprehensive loss (-$7.5bn) — not economic fragility, but it requires reading ROIC with that context.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The driver of a defense contractor is the contracted backlog converting into recognized revenue under the cost-to-cost method. Total backlog reached $193.6bn (+11%), with 62% already funded ($120.2bn). The F-35 — 27% of consolidated revenue and 67% of Aeronautics — is the anchor program, with 1,293 aircraft delivered since inception and a firm backlog of 368 additional units following the Lot 18/19 contract (296 aircraft, Q3 2025). Missiles and Fire Control grew fastest on global demand for missile defense; Rotary and Mission Systems was nearly flat due to the one-off losses on the CMHP/TUHP helicopter programs.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (28-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. Revenue growing +5.6% FY25/+7.2% TTM, backed by an already-contracted +11% backlog — real, not monetary, growth (reports in USD).
• Growth driver. Missiles and Fire Control leads (+13.9%, global demand for missile defense); Rotary and Mission Systems nearly flat (+0.3%) due to the CMHP/TUHP losses.
• Deceleration and cycle. Trajectory accelerating (2.4%→5.1%→5.6%→7.2%), not decelerating — unusual, backed by the contracted backlog, not by an extrapolation.

• Relevant in 10 years (recurrence). Decades-long defense programs (the F-35 designed to fly into the 2070s), multi-year government contracts — extremely high recurrence.
• Pricing power. Limited on fixed-price contracts (cost-overrun risk is borne by Lockheed Martin, the source of the reach-forward losses); more protected on cost-reimbursable contracts and in sustainment of already-deployed programs.
• Moat and its direction. Wide and stable — security clearance barriers, program incumbency, switching costs. Other transaction authority (OTA) opens the door to non-traditional contractors on new programs.
• Capital cycle. A sector with extreme barriers to entry (only a handful of global primes); capital cannot freely enter to compete for the F-35 or already-incumbent classified programs.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 1.5x
• –Interest coverage (EBIT / interest)no data
• !Liquidity (current ratio)1.09×
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 121% of ROIC
• ✓Value creation (ROIC − 10% bar)+22pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.0x — no over-investment
• ✓Float / working capitalFrees up cash $1.6 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.4% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Net debt ~$16.7bn, solid coverage given FCF; low book equity is a product of historical buybacks, not operating losses.
• Pension. Pension liability $3.9bn + other comprehensive loss of -$7.5bn — a long-standing accounting drag, managed through partial transfers to insurers (Dec 2025).
• Liquidity / cash. $4.1bn of cash at the end of FY2025; real FCF for the twelve months to Jun 30, 2026 (~$8.7bn) covers dividend + buyback without additional leverage.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. No ownership data from the DEF 14A proxy in this pipeline (detail pending). Taiclet is CEO since 2020, Chairman since 2021, on the board since 2018 — executive continuity.
• Capital allocation. Returns most of the real FCF (dividend + buyback ≈56% of TTM FCF); buyback decelerating ($7.9bn FY22 → $1.75bn TTM) with $8.3bn of remaining authorization.
• Integrity / normalization. Discloses the reach-forward losses with program-level detail (even if classified) and their exact magnitude in the 10-K — transparency on the fixed-price catch-up.

• Forced/emotional selling triggered by a one-off charge that sinks GAAP: reach-forward losses on fixed-price contracts ($950M+$570M+$95M in 2025, ~$1.955bn in 2024) are one-off catch-ups on specific programs, recognized all at once under the cost-to-cost method — they depress reported operating income without reflecting the business's value-generating power.
• The market extrapolates the recently depressed margin instead of reading the recovery trajectory: the TTM (~11.9%) is already above FY2024 (9.9%) and FY2025 (10.3%), on the way to the ~12.6% historical level of FY22-23.
• Trades at EV/EBIT ~15×, below the floor of the aerospace band, despite a backlog at record highs ($193.6bn, +11%) and ROIC ~32%.

This is a classic case of GAAP hit by one-off catch-ups on specific fixed-price contracts (Aeronautics, MFC, RMS), not a broken business: the backlog is growing, the TTM margin is already recovering, and the moat (security clearance barriers + program incumbency) has not moved. The real risk — and the reason not to pay more than the floor-to-center of the aerospace band — is that new reach-forward losses appear on other fixed-price contracts before the margin finishes normalizing.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +5%/year (+28% total): the margin of safety protects the downside. The bull (+25%/year, +205% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Reach-forward loss (the central disconfirming factor). New catch-up losses on other fixed-price contracts (classified or not) would hit the margin again, with the market failing to distinguish the one-off from the structural.
• Budget / U.S. government. 72% of sales depends on annual Congressional appropriations — cuts or prolonged government shutdowns.
• OTA competition. Non-traditional contractors gaining ground on new programs via other transaction authority mechanisms.
• F-35 concentration. 27% of consolidated revenue in a single program — any cut or delay has a disproportionate impact.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 32% above the 10% bar, but the margin is limited (+33%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 6% at a multiple/growth of 2.3 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 7% (EBIT/EV) + ROIC 32% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -5% vs our 6%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +2%/yr, bull-scenario ceiling +23%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, intangibles, efficient scale, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -5%, within what we project (6%) — the story squares with the numbers.