Al Root

Lockheed stock dipped as Deutsche Bank downgraded the shares, reversing a mid-2024 upgrade, as Chinese progress in developing jet fighters raises doubts about sales of the F-35.

Analyst Scott Deuschle cut his rating from Buy to Hold and lowered his target for the stock price to $523 from $611. Lockheed stock was down 0.2% at $484.98 in midday trading while the S&P 500 and Dow Jones Industrial Average were up about 0.4% and 0.2%, respectively.

He upgraded shares to Buy in July, believing earnings growth would accelerate, leading to a higher valuation multiple.

"We're downgrading Lockheed to Hold (from Buy) as we feel our prior thesis struggles to hold water and we have increased concern on the long-term support for F-35 in the face of China's combat aircraft modernization efforts," wrote Deuschle.

"We're struggling to find a compelling upside case on estimates," wrote Deuschle. That means slower earnings growth. What is more, he said he sees OK? "the reveal of further advancements in combat aircraft capabilities by China as potentially undermining long-term DoD demand for the F-35 aircraft."

China recently published videos of its sixth-generation jet fighter. It looks a little like a UFO, with a diamond shape and no traditional tail fins.

The F-35, which accounts for some 25% of Lockheed's total sales, is a fifth-generation jet fighter.

While the U.S. has sixth-generation jet fighter programs, referred to as next-generation air dominance, or NGAD, and Lockheed is likely bidding to provide those planes, how the process will play out isn't clear. Defense contractors don't talk about early-stage contracts, and uncertainty weighs on stock valuations.

"The developments in China are likely to accelerate the need for NGAD, and the ultimate success in fielding NGAD by the early-mid 2030s could...partially cut into the F-35 procurement program," Deuschle said.

He said that Lockheed could ultimately win NGAD, helping the stock next year. The problems is that a Lockheed competitor such as Boeing could also win the award.

The F-35 is used by the U.S. Navy, Air Force, and Marines as well as 20 countries across the globe. More than 1,000 jets are in operation.

The program has been a win for Lockheed investors but it has also generated some anxiety. In November, Tesla CEO Elon Musk criticized crewed jets, indicating he preferred unmanned technology and creating some volatility in Lockheed stock.

Investors need to track Musk's opinions. He runs Tesla as well as the world's most valuable aerospace company, SpaceX. He also co-runs the so-called Department of Government Efficiency with Vivek Ramaswamy, which will recommend how to curtail government spending.

Overall, 42% of analysts covering Lockheed stock rate the shares at Buy, according to FactSet, while the average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target for Lockheed shares is about $602.

Write to Al Root at allen.root@dowjones.com

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January 02, 2025 13:39 ET (18:39 GMT)

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