Key points
- Defense stocks are higher, but the results have Lockheed Martin and RTX Corporation moving in opposite directions.
- The guidance is solid, but one leaning towards strength, the other towards weakness, and analysts have taken note.
- Analyst sentiment is changing for these stocks and will help one fly higher and the other wallow into 2024.
- 5 stocks we like better than RTX
Lockheed Martin Corporation New York Stock Exchange: LMT AND RTX Corporation New York Stock Exchange: RTX are moving in opposite directions following the fourth quarter reports, suggesting one market is buying and the other selling.
However, the details contained in the reports fall short of that expectation; instead they support the idea that both titles are purchasable, but that one is still the better buy.
Investors looking for solid business growth, ample free cash flow, market-beating dividends, distribution growth and share repurchases will be pleased with what they find. These businesses are supported by underlying market strength, have received strong guidance and are on track for sustained capital return growth in 2024 and 2025.
What is the difference between RTX and Lockheed Martin?
RTX and Lockheed Martin operate in the aerospace and defense sector. While Lockheed Martin is a pure defense and government spending play, RTX Corporation has a sizable commercial business that helps support growth.
First-quarter results reflect the difference between them, with RTX’s revenue growing on commercial demand and Lockheed Martin contracting, albeit by a narrow margin. However, the bottom line is that both companies beat consensus estimates by wide margins and provided solid outlooks for 2024.
They provided solid guidance with a nuance of difference that highlights the importance of earnings to a stock’s price. Both provided mixed guidance from the consensus, with revenue or earnings falling short of the consensus target while the other outperformed.
The shadow of the difference is that RTX, whose stock price rose after the release, delivered weak revenue but strong earnings guidance, while Lockheed Martin did the opposite.
The key detail is that both companies have led growth outlooks for 2024 and have record backlogs to support it. The only things that could prevent them from taking action are internal failures or events outside their control, which are not currently contemplated. More importantly, the guidance supports the capital return outlook for each, and it is substantial.
Value and return in the defense sector
When it comes to value, RTX and Lockheed Martin align with each other and the overall market. Both have a P/E valuation of 16.5x for this year, which will fall to 14x for next.
However, dividends are above average in the range of 2.65% to 2.9%, providing further incentives for investors. Both have low payout ratios and a history of increases, so further distribution increases are expected. The difference is that RTX made smaller raises while Lockheed made larger raises, but the stock buybacks compound both payouts.
Lockheed Martin’s 2.9% dividend yield was effectively doubled in 2023 thanks to buybacks. The company spent $9.1 billion on dividends and buybacks, with $6 going to buybacks. At the end of the quarter, activity fell to 4.7% year-on-year. RTX upped the ante, executing an accelerated buyback plan in the fourth quarter. It bought back $10.3 billion in the quarter and $12.9 billion in the year, reducing the bill to 7.75%.
Analyst sentiment tips the scales: RTX is at the top
Analysts rate both stocks as Hold, but there is a difference in post-release activity that makes RTX the winner in this comparison. RTX analysts are raising their price targets and even got an upgrade to Neutral from Bank of America. On the other hand, Lockheed Martin analysts are lowering their price targets and may cap earnings in 2024.
The charts reflect news, outlook and analyst sentiment. Both are in an uptrend, but RTX is moving higher now and will lead the pair this year. Investors interested in LMT can target the long-term trend line as an entry point.
The region between $400 and $420 could produce significant support. RTX investors could push this stock higher, but there is risk. There is significant potential for resistance at current levels that could prompt a price correction. A critical level is near $92. A move above that level could lead the market to retest the all-time high.
Before considering RTX, you’ll want to hear this.
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