Shares of Lockheed Martin (LMT -0.01%) have managed to sustain a major rally this year despite the recent period of extreme market volatility. The stock will rise about 21% in 2024 and be near an all-time high, although the S&P500 has fallen by more than 7% from its peak in recent weeks.

This momentum is good news for investors, as it suggests the stock remains well supported by strong fundamentals and a positive outlook. In this case, the defense giant is using a boom in demand due to ongoing geopolitical conflicts as a tailwind for its earnings.

Would Lockheed Martin be a good addition to your portfolio? Here’s what you need to know.

Digital transformation as a growth engine

A key focus for Lockheed Martin is its ongoing 21st Century Security initiative, which aims to accelerate the integration of more advanced technologies across its product portfolio.

This move is important because military programs are typically subject to a complex approval process for design updates and new software solutions. The effort includes investments in artificial intelligence and strengthening cybersecurity capabilities, which are key growth drivers. The goal is to achieve more diversified growth with increased profitability.

The strategy appears to be paying off. Lockheed recently reported second-quarter results (for the period ended June 30) with earnings per share (EPS) of $6.85, up from $6.63 in the year-ago quarter. Revenue of $18.1 billion rose 9% year-over-year and is nearly $1 billion above Wall Street’s average estimate. Even more impressive is the performance of free cash flow, which reached $1.5 billion, nearly double the $777 million expected in the second quarter of 2023.

Management points to momentum in the rotation and mission systems segment, where second-quarter revenues increased 17% year over year. This group includes over 1,000 programs for helicopters, radar and reconnaissance control that are proving critical in active theaters in Eastern Europe and the Middle East. The missile and fire control business was also strong, with revenue growth of 13% in the quarter.

Perhaps the biggest development for Lockheed Martin this year is the resumption of F-35 jet deliveries for the U.S. Department of Defense, which had stalled last year due to necessary hardware and software updates. An increase in production as part of the company’s digital transformation strategy is expected to lead to improved growth prospects for its core aerospace segment.

As for forecasts, trends were good enough for the company to raise its full-year guidance. Lockheed Martin now expects earnings per share for 2024 to be between $26.10 and $26.60, above the previous estimate of $26, on revenue between $70.5 billion and $71.5 billion, up about 6% from 2023.

Image source: Getty Images.

A leading company in the defense sector with an attractive valuation

Lockheed Martin’s attractiveness as an investment opportunity begins with its industry leadership in a market area that has grown in importance in recent years, from the onset of the Russia-Ukraine conflict in 2022 to the more recent situation in the Red Sea.

We can all hope for a quick and peaceful resolution, but the reality is that national security is big business. Lockheed Martin is well positioned to capture the increasing defense budgets of allied forces around the world.

I believe the stock, which trades at 21 times 2024 EPS estimates, is undervalued compared to peers such as RTX, Northrop GrummanAnd General dynamicswhich are valued at a similar average yield premium.

The key here is that Lockheed Martin’s positioning in high-profile programs like the F-35 fighter jet or the Sikorsky UH-60 Black Hawk helicopter could justify an even higher premium. Ultimately, the company’s ability to expand margins as it moves more into the high-tech space should allow the stock to trade at a higher valuation differential than its peers over time.

LMT P/E ratio (forward) data from YCharts

Decision on Lockheed Martin shares

Lockheed Martin has many positive aspects, as the company has generated positive shareholder returns throughout its long history. The combination of a steady growth outlook and overall solid fundamentals justifies a buy recommendation for the stock in my opinion.

Investors interested in the stock might consider adding a position to a diversified portfolio. I like the dollar-cost averaging strategy, which involves buying shares over a longer period of time to mitigate short-term volatility.