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a contract worth almost $23 billion in tomahawk missiles and the host of a widely followed financial show on Wall Street comes out and says the stock is still expensive and yet today it barely moved. It rose 7/10 of a percent that speaks of euphoria or panic. That is the first oddity. If the contract is so big, why does the market shrug it off?
The question that interests me is not whether the contract is good. Obviously, it is. It is whether that opinion that it is expensive holds up to a serious analysis of the numbers. Stick around because I am going to dig into the balance sheet, what it already has sold ahead and the valuation. And at the end, I will tell you what I think it is worth.
Jim Kramer, the host of Mad Money on CNBC, came out with a direct message. Despite a 22 bill900 million deal in Tomahawk missiles, in his view, the stock of this defense giant is still too expensive. It is a strong statement because it comes right after news that in any other context would trigger market excitement.
And that is where the contrast worth investigating appears. A confirmed multi-billion dollar contract, an influential figure talking down the price, and a stock that did not even flinch on the street. When public opinion clashes this way with the market's actual reaction, there is something worth unpacking with numbers.
A giant contract, a warning that it is expensive, and the price did not even flinch. Who is right? Last quarter, the business earned $7.94 per share, well above the $7.22 the market expected, a surprise of more than 10 percentage points. That is not just any number. It means the operation is generating more profitability than analysts thought possible.
Right at a time when everyone is debating whether the price already has too much optimism baked in. The trajectory of recent months tells a story of recovery with bumps. It comes from a floor well below 430, climbed hard to near 680, and then corrected now sitting well below that ceiling. It is not a broken ceiling nor a punctured floor.
It is a stock that tested its yearly high and is still digesting that rally. Now, let us go inside. Do the numbers support such a contract or is it just noise? Revenue grew a little over 10% year-over-year, but what stands out is gross profit, which jumped more than 200%. A sign that something changed in the business mix or in how it is billing.
With a net profit of 1 bill836 million on 20 billion in revenue, the business generates plenty of cash, more than 3 bill00 million in operating cash flow. Though, it is worth keeping in mind that total debt is quite a bit larger than the company's equity. Today the stock rose 0.7%. Its sector fell 0.1%.
And the S&P 500 dropped 0.4%. So it was not the general market mood that pushed it up. While the whole market and its own sector were correcting, it moved in the opposite direction on its own. That is merit of its own, not a tailwind. Let us get to the diagnosis. Are these numbers healthy? The gross margin is only 10% and that already says a lot.
There is no pricing power like in a software company. here competes by manufacturing at scale with tight margins. Debt is high with more than three times equity and liabilities, a level that requires the business to keep generating cash consistently. And yet, it keeps buying back shares, something only done when management is confident the business will keep performing.
Overall, a profitable business by volume, but leveraged that needs the contract machine to keep running. This company already has a solid amount of contracted work, but what is that number made of? of its backlog. 31% is combat aviation and military transport. 25% is helicopters and naval/mission systems.
24% is air defense systems and missiles. That is what it already has sold seen from the inside. A giant contract on one side, insiders selling on the other, which weighs more. And what can push its price up? Long-term government contracts with years of revenue visibility, robust operating cash and active buybacks.
Analysts see it at plus 18.7% above today's price. Cash is up plus 193.2% year-over-year. It reduced share count by 1.4% this year. But there are also things that could hold it back. A price to book of almost 14 times leaves little room for error. Sales far outweigh purchases in recent months. High debt relative to equity.
Gross margin of only 10.2%. Each of these forces is what needs to be watched closely from here on. An auto parts supplier began delivering the first components for a key interceptor system, reinforcing the defense supply chain. Interest emerged in selling a new fighter jet to the Air Force, which would open another future revenue line, and the courts rejected an antitrust claim from an alleged inventor of a missile shield system, clearing a legal front.
Of the 47 news items reviewed, 43 were positive. The market has been building a clearly favorable narrative around the business. We now know what moves it. Now the number everyone wants, what it is really worth. We are talking about Loheed Martin. Today it trades at $53,725 and that is where the tension appears.
The discounted cash flow puts it quite a bit lower near 327 while the average analyst target is quite a bit higher around 638 and upside of nearly 19%. It trades at almost 20 times earnings and more than 14 times book value with a peg just above one, meaning growth barely justifies the price. But there is no extra room.
It also pays a modest dividend, typical of a mature company that distributes cash while still growing. The market today is standing right in the middle of two opposing views, and I will give you my take on which one weighs more. Insiders sold more than 6,000 shares against just 180 bought a huge imbalance.
And if you look month by month, the pattern is clear. June had some buying, but July and especially August saw selling that accelerated sharply. It is a signal that cannot be ignored right when the stock is trading far from its 52- week high. Those who know the business best have been reducing their positions.
On the strong side, the business is growing at double digits with a huge earning surprise, generous cash flow, and active buybacks that show internal confidence in the model. But the problem shows up when you cross that with the discounted cash flow which places it well below the current price and with insiders who have been selling hard right in this stretch.
For me, today I see it in the range of $420 to $440. If the new contracts F-16 air defense get confirmed and the margin keeps expanding, it could approach 550. If the flow of new contracts cools off and debt starts weighing on results, it could pull back to 340. The question that lingers is not whether the contracts will keep coming.
They probably will. But whether that leverage and that demanding valuation leave room for something to go wrong without being punished, that is what needs to be watched from here on. the pace of new contracts, how debt evolves, and whether insiders change direction. In the end, it all comes down to this.
The contract is real, but the question is whether the price already got ahead of itself. The question is no longer whether the contract is good, but whether the market already priced it in too soon. Subscribe and let me know in the comments which stock you want me to analyze.
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