LMT is a buy with medium conviction due to undervaluation (forward P/E 16.6; fair value $660 vs price $544).

Amid rising geopolitical tensions, it is not surprising that Lockheed Martin has received a $64 billion increase in its order book . This brings its total order book to $230 billion, and this quarterly increase is larger in magnitude than some AI companies that are experiencing increased demand.

Because the management team invested in increasing manufacturing capacity ahead of some of these new orders, the company was able to tap into the demand sooner than expected. Revenue rose 11% in the last quarter ending to exceed $20 billion.

But does all this make Lockheed Martin stock a buying opportunity? Lockheed's sales have been on the rise for nearly a decade, and in the past 12 months, they reached $77 billion , up from about $40 billion in 2017.

Given the increasing geopolitical tension and rising defense budgets in countries ranging from the United States to Europe and Asia, it is reasonable to assume that Lockheed Martin may maintain double-digit revenue growth for the foreseeable future.

Lockheed Martin is no different from them in that respect. Its operating profit margin over the past 12 months was 11.8%. It is improving, but this type of operating profit margin is still very unprofitable.

The challenge for Lockheed Martin lies in manufacturing efficiency. As I mentioned in the introduction, they have orders worth hundreds of billions of dollars. Order books are increasing.

Sales are not a problem. The problem is manufacturing effectively to meet those demands while still leaving a good margin available for the company to make a profit; That is, the difference between what you offer to win these contracts and the cost of manufacturing these products, which allows the company to generate a profit margin.

Its return on invested capital appears to be much better than its operating profit margin, and at the industry level, and among all the companies I mentioned earlier, Lockheed Martin boasts one of the best returns on invested capital.

Not only in the last 12 months by 22 %, but over the previous decade it has achieved a better return on invested capital on average compared to its peers among defense contractors.

Furthermore , this return on invested capital is more than twice the company's weighted average cost of capital. Therefore, the company generates significant value for shareholders for every dollar invested in the business.

The company has invested more in its business in preparation for new orders. The management team anticipates an increase in orders not only from the United States, but also from America’s allies in Europe and Asia, and is already working to develop those manufacturing capabilities abroad to produce some of the ATACMS defense systems.

Surprisingly, the valuation is close to the lowest point it has reached in several years. I say surprising because there is an increase in budget allocations from governments around the world for defense spending.

The United States is pressuring its allies to spend more on their own defense, and the United States itself is increasing its own defense budgets. There is increasing geopolitical tension , and there are several actual wars going on as we speak .

Against this backdrop, I am surprised that Lockheed Martin is trading at a forward price-to-earnings ratio of only 16.6. This is close to the lowest trading level for this stock in several years.

The valuation also appears to be undervalued similarly when I use my discounted cash flow model to perform the calculations. I estimated the fair value of the stock at $660, and you can buy it today for $544.

This leaves room for an upside of approximately 21% over the next 12 to 18 months for Lockheed Martin stock investors.

This type of upside opportunity is rare when you are evaluating a defensive contractor with a relatively low risk coefficient ( beta). This means it is less dependent on macroeconomic factors such as unemployment, and therefore provides investors with a degree of diversification in their investment portfolios.

I last evaluated the company around April, where I rated the stock as a buy opportunity with a low conviction level. And today I will repeat this classification. I rate Lockheed Martin stock as a buy opportunity, but I will raise my conviction level to medium given the improvement in the company’s performance, given that the valuation has improved sequentially, and given expectations of continued increases in the defense budgets of the United States and its allies.