Figuring out whether Lockheed Martin stock is overvalued isn't a matter of gut feeling or headline scanning. It requires a disciplined look at valuation multiples like P/E, price-to-sales, and PEG ratios, then stacking those numbers against defense sector peers and LMT's own five-year history. That comparison is the only honest way to judge whether the stock's price tag makes sense or has drifted into expensive territory.
Key takeaways
- No single ratio tells you if LMT is overvalued. P/E, price-to-sales, and PEG each capture different dimensions of valuation, and they sometimes disagree.
- Defense contractors as a group tend to trade at lower multiples than the broader market, so comparing LMT to the S&P 500 average is misleading. Peer-to-peer comparison is what matters.
- LMT has historically commanded a slight premium over some defense peers due to its backlog size and contract mix, but that premium fluctuates with earnings cycles and sentiment shifts.
- Forward estimates matter as much as trailing multiples. A stock can look expensive on trailing P/E but reasonable on a forward basis if earnings growth is accelerating.
- Valuation is only one input. Backlog durability, free cash flow generation, and capital return policy all feed into whether a given multiple is justified.
What does "overvalued" actually mean for a defense stock?
Calling a stock overvalued sounds definitive, but it's really a relative judgment. A stock is overvalued when its market price implies expectations that exceed what the underlying business is likely to deliver. For a defense contractor like Lockheed Martin, that means asking whether the price bakes in more revenue growth, margin expansion, or contract wins than the company can reasonably achieve.
Overvalued: A stock trading at a price higher than what its fundamentals (earnings, cash flow, growth rate) would justify relative to comparable companies or its own historical range. It doesn't mean the price will fall tomorrow, only that the margin of safety is thinner.
The tricky part with defense stocks is that their revenue visibility is unusually high. Long-term government contracts create predictable cash flows that most industries would envy. That predictability often justifies a higher multiple than you'd assign to a cyclical manufacturer. So when you're evaluating whether Lockheed Martin fair value aligns with its market price, you have to factor in that stability premium without overpaying for it.
Is LMT expensive on a P/E basis compared to defense peers?
The price-to-earnings ratio is where most investors start, and for good reason. It's intuitive: how many dollars are you paying for each dollar of earnings? But the number only becomes useful when you compare it to something.
Major defense contractors like Raytheon Technologies (RTX), Northrop Grumman (NOC), General Dynamics (GD), and L3Harris Technologies (LHX) form the natural peer set. Historically, this group has traded with trailing P/E ratios in a band roughly between 15 and 22, depending on the earnings cycle and broader market sentiment. LMT has typically sat in the middle-to-upper portion of that range.
Here's what to look for when doing this comparison yourself:
- Trailing P/E vs. forward P/E: Trailing uses the last twelve months of earnings. Forward uses analyst estimates for the next twelve months. If LMT's trailing P/E looks high but its forward P/E is closer to the peer average, that may signal earnings growth is expected to close the gap.
- Earnings quality: One-time charges, pension adjustments, or large contract write-downs can distort a single year's earnings. Look at normalized or adjusted earnings for a cleaner comparison.
- Cycle timing: After a strong earnings year, P/E may look artificially low. After a weak one, it may look inflated. Check whether you're comparing apples to apples across the peer group.
You can pull up LMT's current and historical P/E on the Lockheed Martin research page on Rallies.ai and run a side-by-side with peers without building your own spreadsheet.
How does price-to-sales tell a different story about LMT valuation?
Price-to-sales (P/S) strips out the noise from earnings accounting. It simply asks: how much are you paying per dollar of revenue? This is especially useful for defense companies because their revenue is largely contracted and less volatile than earnings, which get hit by pension assumptions, R&D capitalization decisions, and segment-level margin swings.
Price-to-sales (P/S) ratio: Market capitalization divided by total revenue over the trailing twelve months. A lower P/S suggests you're paying less per dollar of sales. Useful when earnings are lumpy or distorted by non-operational items.
Defense contractors generally trade at P/S ratios between 1.0 and 2.5. The range is tighter than you'd see in tech or healthcare because revenue growth rates in defense are modest. LMT's P/S has historically hovered in the 1.5 to 2.0 zone, which places it in the middle of the pack. If LMT's P/S climbs above 2.0 while peers remain closer to 1.5, that's a signal the market is pricing in either higher growth expectations or a margin premium that deserves scrutiny.
One thing P/S doesn't capture: profitability. A company with fat margins deserves a higher P/S than one grinding out thin margins on similar revenue. LMT's operating margins in its Aeronautics and Missiles & Fire Control segments have generally been competitive within the peer group, which provides some justification for a slightly elevated P/S. But "slightly elevated" and "expensive" are different things, and the gap between them is where your own analysis matters.
What the PEG ratio reveals about whether Lockheed Martin stock is overvalued
The PEG ratio takes the P/E and adjusts it for expected earnings growth. A P/E of 20 means something very different for a company growing earnings at 12% per year versus one growing at 3%. The PEG ratio tries to normalize that difference.
PEG ratio: Price-to-earnings divided by the expected annual earnings growth rate. A PEG of 1.0 is often used as a rough benchmark for "fairly valued." Below 1.0 may suggest undervaluation; above 1.0 may suggest overvaluation. But the benchmark is a rule of thumb, not a law.
Here's where defense stocks get interesting. Their earnings growth rates are typically moderate, somewhere in the mid-single digits. That means even a modest P/E in absolute terms can translate into a PEG above 1.0. If LMT has a P/E of 18 and expected earnings growth of 5%, its PEG is 3.6. That looks expensive. But if every major defense peer also has a PEG between 2.5 and 4.0, then LMT's number is just par for the course in this sector.
The mistake many investors make is comparing a defense contractor's PEG to a tech company's PEG. That comparison is meaningless. Defense and tech operate in completely different growth regimes. You need to compare LMT's PEG to RTX's PEG, to NOC's PEG, to GD's PEG. That peer-relative context is the only version that tells you anything useful about whether LMT is expensive relative to its actual competitive set.
If you want to pull this comparison quickly, the Rallies AI Research Assistant can run multi-ticker valuation comparisons in seconds.
Has LMT historically traded at a premium or discount to peers?
Over the past five years, LMT has generally traded at a modest premium to the defense sector average on a P/E basis. That premium has been in the range of 5-15% above the group median in most periods, though it has narrowed or occasionally flipped to a slight discount during periods of program-level uncertainty or when peers had stronger near-term earnings momentum.
Several factors explain why the market has been willing to pay a bit more for LMT:
- Backlog size: LMT has consistently carried one of the largest backlogs in the defense industry, often exceeding two years of annual revenue. That gives revenue visibility that few competitors can match.
- F-35 program dominance: The F-35 Joint Strike Fighter program is the largest defense program in history. It provides a revenue anchor that extends for decades, including international sales and sustainment contracts.
- Capital returns: LMT has maintained aggressive share buyback programs and consistent dividend growth, which supports per-share earnings growth even when top-line growth is modest.
- Margin profile: Certain LMT segments, particularly Missiles & Fire Control, have earned margins at the high end of the defense peer range.
That said, the premium isn't guaranteed. When LMT's organic growth slows relative to peers, or when a competitor wins a major contract that reshuffles expectations, the premium compresses. Checking whether the current premium is wider or narrower than the five-year average is a practical way to gauge whether the stock has gotten ahead of itself.
A framework for estimating Lockheed Martin fair value
Rather than relying on any single metric, a more robust approach combines several valuation lenses and looks for convergence. Here's a straightforward framework you can apply:
- Establish peer medians: Calculate the median trailing P/E, forward P/E, P/S, and PEG for the four or five closest defense peers. This becomes your baseline.
- Calculate LMT's premium or discount: For each metric, express LMT's ratio as a percentage above or below the peer median. If LMT's trailing P/E is 19 and the peer median is 17, that's an 11.8% premium.
- Compare to the five-year average premium: If LMT typically trades at a 10% P/E premium and it's now at 20%, the stock may be stretched. If it's at 5%, it might be relatively attractive within its historical context.
- Cross-check with P/S and PEG: If P/E says slightly expensive but P/S says in-line and PEG says slightly cheap, the picture is mixed, which is honest and normal. Unanimous signals across all three ratios are more meaningful than any single reading.
- Adjust for qualitative factors: Has the backlog grown or shrunk? Are margins expanding or compressing? Is the dividend payout ratio rising (which could limit future buybacks)? These qualitative inputs explain why the market might justify a higher or lower multiple than history suggests.
This framework doesn't give you a magic number. It gives you a range and a sense of where the stock sits within that range. That's more useful than a false precision target price.
For investors who want to explore financial metrics in more depth, building comfort with these ratios across multiple sectors strengthens your ability to spot valuation disconnects anywhere.
Common mistakes when assessing whether a stock is overvalued
Even experienced investors fall into traps when doing valuation work. A few of the most common:
- Using the S&P 500 P/E as the benchmark: The broad market average includes high-growth tech, fast-growing healthcare, and everything else. It's not a relevant comparison for a mature defense contractor. Always use sector-specific peers.
- Ignoring the earnings growth denominator in PEG: A high P/E paired with strong growth may actually be cheaper than a low P/E paired with no growth. PEG helps, but only if you trust the growth estimate. Consensus estimates can be wrong.
- Anchoring to a past price: "LMT used to trade at 15x earnings, so 19x must be overvalued." Maybe. Or maybe the business has changed (better margins, bigger backlog, faster cash conversion). Anchoring to old multiples without checking whether the fundamentals have shifted is a frequent error.
- Treating valuation as a timing tool: A stock can be overvalued and keep rising for years if earnings grow into the multiple. Valuation tells you about risk and margin of safety, not about what happens next week.
The Rallies Vibe Screener can help you filter for defense stocks by valuation metrics so you can see where each name falls relative to the group, rather than evaluating LMT in isolation.
Try it yourself
Want to run this kind of analysis on your own? Copy any of these prompts and paste them into the Rallies AI Research Assistant:
- Compare Lockheed Martin's valuation metrics to other major defense contractors — how do their P/E, price-to-sales, and PEG ratios stack up against the sector average, and has LMT historically traded at a premium or discount over the past five years?
- Is Lockheed Martin stock expensive? Compare its P/E, price-to-sales, and forward estimates to the rest of its industry.
- What is Lockheed Martin's five-year average P/E premium over Northrop Grumman, Raytheon, and General Dynamics, and how does the current premium compare?
Frequently asked questions
Is LMT expensive compared to other defense stocks?
LMT has historically traded at a slight premium to the defense sector median on most valuation metrics. Whether that premium is justified depends on its backlog strength, margin trajectory, and earnings growth relative to peers like RTX, NOC, and GD. A premium within its historical range is normal; a premium well above that range warrants closer scrutiny.
What is a good P/E ratio for Lockheed Martin?
There's no universal "good" P/E. For LMT, the useful question is how its P/E compares to the defense peer group median and to its own five-year average. If it's within one or two points of both, the market is pricing it roughly in line with expectations. Significant deviation in either direction is a signal worth investigating, not an automatic buy or sell indicator.
How do you determine Lockheed Martin fair value?
One approach is to apply the defense sector's median P/E and P/S ratios to LMT's earnings and revenue, then adjust for any premium or discount the stock has historically commanded. Comparing that implied valuation to the actual market cap gives you a rough sense of whether the stock is trading above, below, or near fair value. No single method is definitive, so cross-referencing multiple approaches reduces the chance of a misleading conclusion.
Does LMT's backlog justify a higher valuation than peers?
Backlog provides revenue visibility, which the market values because it lowers earnings uncertainty. LMT's backlog-to-revenue ratio has typically been among the highest in the defense sector. That tends to support a modest valuation premium, but "modest" is the key word. If the premium grows too large relative to history, the market may be overweighting backlog and underweighting execution risk or margin pressure.
Why does LMT valuation matter for long-term investors?
Valuation at the point of purchase is one of the strongest predictors of long-term returns. Buying at an elevated multiple compresses future return potential even if the business performs well. For a steady, moderate-growth company like LMT, overpaying by even a few multiple points can meaningfully reduce annualized returns over a five-to-ten-year holding period.
What's the difference between trailing and forward P/E for defense stocks?
Trailing P/E uses earnings from the past twelve months. Forward P/E uses consensus analyst estimates for the next twelve months. For defense companies with relatively predictable revenue streams, the gap between trailing and forward P/E tends to be smaller than in more volatile sectors. But when a large contract ramp-up or wind-down is expected, forward P/E can diverge meaningfully and may give a better picture of where earnings are headed.
Can a stock be overvalued and still go up?
Yes. Valuation is about probability and risk, not prediction. An overvalued stock can continue rising if earnings grow faster than expected, if investor sentiment improves, or if interest rates shift in its favor. Overvaluation means the margin of safety is thinner and the downside risk is greater if things don't go as well as expected. It's a risk assessment tool, not a crystal ball.
Bottom line
Answering whether Lockheed Martin stock is overvalued comes down to peer-relative comparisons across P/E, price-to-sales, and PEG ratios, then checking those readings against LMT's own five-year valuation history. The stock has typically traded at a modest premium to defense peers, supported by its backlog depth and margin profile, so the real question is whether that premium has stretched beyond its normal range.
No single ratio gives the full picture. Combining multiple valuation lenses and adjusting for qualitative factors like contract momentum and capital returns policy is the most reliable approach. To build a stronger foundation in the metrics that matter, explore more financial metrics frameworks and analysis and run your own comparisons using Rallies.ai.
Disclaimer: This article is for educational and informational purposes only. It does not constitute investment advice, financial advice, trading advice, or any other type of advice. Rallies.ai does not recommend that any security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. All investments involve risk, including the possible loss of principal. Past performance does not guarantee future results. Before making any investment decision, consult with a qualified financial advisor and conduct your own research.
Written by Gav Blaxberg, CEO of WOLF Financial and Co-Founder of Rallies.ai.
