Lockheed Martin gains as Morgan Stanley upgrades stock on F-35 deal

What happened

Lockheed Martin shares rose 1.2% in premarket trading Monday after Morgan Stanley upgraded the stock to Overweight from Equal Weight and raised its price target to $835 from $690, following an agreement for the U.S. government to purchase at least 850 additional F-35 fighter jets.

Confirmed

Global impact / market context

The agreement gives investors more certainty that Lockheed Martin's largest defense program, the F-35 fighter jet, will keep generating revenue. Morgan Stanley also sees potential for extra revenue from missile contracts, which could support earnings growth and a higher valuation for the company.

Analyst inference

The upgrade comes as investors weigh whether Pentagon spending on the F-35 could be cut to fund more missile procurement. Lockheed Martin shares had rebounded more than 20% from their lows, but the analyst said that rally does not fully reflect the improved outlook.

Analyst inference

What to watch

1. Watch whether the U.S. government finalizes the purchase of at least 850 additional F-35 fighter jets, since the deal underpins the reduced uncertainty Morgan Stanley cited in its upgrade. Confirmed
2. Watch Pentagon budget decisions on missile procurement, because more missile spending could add revenue for Lockheed Martin, while cuts to F-35 funding to pay for missiles would hurt its largest program. Analyst inference
3. Watch whether Lockheed Martin's shares hold above their recent rebound of more than 20% from lows, since the analyst argues the rally still does not fully reflect the improved F-35 outlook. Analyst inference

Evidence

• seekingalpha.com