Russia's 2022 invasion of Ukraine, which continues to this day, has made a lot of European countries nervous that they might be next -- and none more so than Poland.
Since Russian tanks first rolled across the Ukrainian border, Poland has spent tens of billions of dollars shoring up its defenses -- $6 billion to buy 250 main battle tanks from General Dynamics (GD +0.02%), another $10 billion for HIMARS rocket launchers from Lockheed Martin (LMT 1.78%), and a further $12 billion to buy 96 Apache attack helicopters from Boeing (BA +1.39%), to name just a few high-profile purchases.
And Poland's shopping list is only getting longer.
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Key Data Points
Missiles for NATO allies
Last week, the U.S. Defense Security Cooperation Agency (the foreign arms sales division of the Pentagon) notified Congress of two new Polish requests to purchase Western arms for its military.
For $1.8 billion, Poland wants to buy 821 AGM-158B-2 Joint Air-to-Surface Standoff Missiles with Extended Range (JASSM-ER) from Lockheed Martin. And Poland has earmarked a further $1.7 billion to spend on RTX Corporation (RTX 0.12%) AIM-120C-8 Advanced Medium-Range Air-to-Air Missiles (AMRAAMs) -- 745 of them -- for its fighter jets.
Together, that's another $3.5 billion worth of American missiles that Poland wishes to buy. It's also $3.5 billion worth of revenue that is essentially guaranteed to flow to Lockheed and RTX, because Congress has literally never denied approval of a foreign arms sale after receiving DSCA notification that one is in the works. (Not that it should. In both of last week's arms deals, as in most deals of this sort, DSCA notes that the U.S. State Department has already signed off on the sales as supporting "the foreign policy goals and national security objectives of the United States by improving the security of a NATO Ally.")
Thus, with DSCA notifications in hand, it's pretty safe for investors in Lockheed and RTX to assume these sales will go through, and that they will turn into revenue (and profits) for the defense companies in due course. Now what does this mean for investors?
Lockheed versus RTX
Lockheed Martin and RTX (formerly known as Raytheon) have a lot in common. Both are sprawling defense conglomerates generating tens of billions of dollars of revenue ($67.6 billion for Lockheed, $68.9 billion for RTX) every year. Both are profitable companies, too, although from a big-picture point of view, Lockheed does a lot better than RTX at turning its revenue into profits.
Last year, RTX reported an operating profit margin of just 7.8% across its several business divisions, according to data from S&P Global Market Intelligence. Lockheed Martin, however, with a 13.4% profit margin, generated 72% more profit per dollar of revenue. Admittedly, much of this divergence in profitability owes to RTX having just gone through a manufacturing crisis in 2023 that dragged down profits -- actually, wiped them out -- at its Pratt & Whitney aircraft engines business.
But even so, Lockheed seems to enjoy stronger profits throughout its business.
Take the specific company divisions responsible for manufacturing missiles, for example. RTX houses its missile operations within a unit bearing the historic name Raytheon and generates a 9% profit margin in that division. Lockheed's missiles come from the more descriptively named missiles and fire control segment, which churns out a 12.9% operating profit on its revenue. So the numbers are closer -- but even so, Lockheed still outearns RTX by 43% per dollar of revenue, which is pretty impressive given that RTX's Raytheon division is much larger in scale, with more than twice the revenue of Lockheed's missiles division.
So what does this mean for investors? Lockheed Martin's superior ability to transform revenue into profit means that, even though RTX is the more valuable company (with $126 billion in total market capitalization to Lockheed's $105 billion), Lockheed is actually the cheaper stock. Not only does Lockheed sell for a lower price-to-sales ratio of 1.6 versus RTX's 2.0. Lockheed's more robust profit margins (and profits, period) give the company an even more attractive price-to-earnings (P/E) multiple of just 15.9, versus RTX's 42.5.
Granted, these valuations will drift closer as time goes by and RTX puts its Pratt & Whitney engine problems behind it. But even so, based on forward earnings projections, most analysts still see Lockheed earning so much in 2024 and RTX so little that Lockheed stock remains cheaper than RTX on a forward P/E basis and a trailing P/E basis.
And so long as that remains the case, investors seeking good value in defense stocks should choose Lockheed Martin over RTX.
