War Billions and Record Orders: Can Lockheed Martin's Results Defend New Highs?

A year ago, Lockheed Martin $LMT experienced one of the worst quarters in its modern history. Write-downs of $1.6 billion on a classified aircraft program and two helicopter contracts crushed quarterly profit to just $342 million, or $1.46 per share. The market began to doubt whether the world's largest defense contractor could even make money on what it signs.

On Thursday came the answer. Second-quarter revenue climbed 11% to $20.1 billion, net income jumped to $1.8 billion, or $7.94 per share, and free cash flow hit $2.9 billion – exactly a year ago it was negative. Analysts surveyed by Zacks had expected earnings of $7.22 per share on revenue of $19.3 billion; the company therefore beat the consensus on earnings by nearly 10% and on revenue by more than 3%. Management also raised the full-year revenue and earnings outlook, and the stock responded with a jump of about 10% to near $567.

But the quarter's biggest number does not lie in the income statement. Lockheed Martin booked $65 billion in new orders over three months, primarily thanks to a multi-year contract for THAAD interceptors worth $35 billion. The backlog consequently swelled to a record $230 billion – meaning the company has roughly three years of contracted work ahead without signing anything else.

And yet, even after Thursday's surge, the stock remains about 18% below its March peak near $692. The market, after all, remembers that the past two years brought more than $3.5 billion in write-downs on poorly priced contracts, that the company lost the sixth-generation fighter competition to Boeing last year, and that deliveries of the key F-35 fell by half in the first six months of the year.

So, is Thursday's quarter proof that Lockheed Martin has truly healed – or is it merely riding the wave of a defense super-cycle that will one day ebb?