Lockheed Stock Falls After Earnings. What Caught Wall Street by Surprise.

Lockheed stock has underperformed the S&P 500 since the Nov. 5 presidential election. Investors are worried that manned fighter jets such as the Lockheed F-35 will be de-emphasized as AI-powered drones proliferate. (Nathan Laine/Bloomberg)

Lockheed Martin’s second-quarter earnings fell well short of Wall Street expectations on a bevy of one-time charges. Investors were ready for some extra expenses, but the amount recorded in the quarter still surprised them.

Lockheed reported earnings per share of $1.46 on sales of $18.2 billion on Tuesday. Wall Street was looking for earnings per share of $6.41 on sales of $18.5 billion, according to Bloomberg. In the year-ago second quarter, the company reported earnings per share of $7.11, net of charges, on sales of $18.1 billion.

Included in the second-quarter earnings-per-share number were charges amounting to $5.83 after tax, totaling $1.7 billion. Charges for classified programs in the company’s aeronautics segment totaled $950 million. Two charges for helicopter programs totaled $665 million. Write-offs for the Air Force’s sixth-generation fighter jet, awarded to Boeing , amounted to $66 million.

Lockheed shares lost 11% on Tuesday, closing at $410.74, while the S&P 500 and Dow Jones Industrial Average rose 0.1% and 0.4%, respectively.

Seaport analyst Richard Safran wrote in a preview report that aeronautics and sixth-generation fighter charges could be as much as $300 million. They turned out to be much larger. The cost to develop the required capabilities, bid years ago, exceeded the original fixed price contract value, Chief Financial Officer Evan Scott explained to Barron’s.

Safran rates Lockheed stock at Buy, but he was leaning “negative into the print as we see risk of higher than expected charges at Aeronautics and a downward guidance revision below consensus.”

As for 2025 guidance, Lockheed management now expects earnings per share to land between $21.70 and $22, down from a prior range of $27 to $27.30. The $5.30 reduction is a little smaller than the amount of the charges. Sales and cash flow guidance for 2025 didn’t change.

There is “no assurance that the pain is over,” wrote Vertical Research Partners analyst Rob Stallard on Tuesday. “While Lockheed management detailed a number of reasons for why these charges had been taken in 2Q, they gave little assurance that the related risk is now behind us…Lockheed is unable to say how long the [classified] program still has to run due to its secretive nature.”

Stallard rates shares Hold and has a $460 price target for the stock. Safran’s price target for Lockheed stock is $670, which values shares at about 22 times estimated 2026 earnings. Lockheed stock now trades for about 15.5 times estimated 2026 earnings, down from an average of roughly 17 times over the past few years.

Part of the reason for the depressed valuation multiple is investors’ angst over drones, U.S. spending priorities, and geopolitics.

Coming into Tuesday, Lockheed has declined about 15% since Tesla CEO Elon Musk criticized manned fighter jets in a late November tweet. Since then, investors have been concerned that more expensive manned fighter jets, such as Lockheed’s F-35, would be phased out faster than expected in favor of lower-cost drones.

Fighters, including the F-35, have proven their worth in recent conflicts with Iran. The company delivered 50 F-35s in the quarter and still has more than 300 in the backlog. Lockheed also works on several unmanned technologies, including higher-priced, more-advanced drones, swarm technologies, and antidrone defense. All that, however, has done little to allay investors’ fears.

Scott also pointed out the company is well-positioned to benefit from President Donald Trump’s Golden Dome missile defense shield. (The dome should eventually cost hundreds of billions of dollars.)

New technologies and growth in military spending in the U.S. and Europe are positives for Lockheed and other defense contractors. Investors, however, appeared to focus on the current quarter and one-time charges in Tuesday trading.

Options markets implied shares would move about 4% up or down following earnings. Shares moved an average of about 5% following the past four quarterly reports. Shares have risen twice and fallen twice over that span.

Write to Al Root at allen.root@dowjones.com