Buying defense stocks at a time of intense, seemingly intensifying, geopolitical conflict might appear to be a no-brainer, but it's not that simple. Backlogs and revenue are growing, and upside potential is considerable.

For a recent example, witness the recent announcement of framework agreements between the U.S. government and Lockheed Martin (NYSE: LMT), BAE Systems, and Honeywell to accelerate production of missile technology, including Precision Strike Missiles (PrSM) used to attack Iran. However, valuations and profitability still matter.

Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »

Defense stocks have outperformed the S&P 500 (SNPINDEX: ^GSPC) since Russia invaded Ukraine in 2022.

This is largely due to soaring backlogs, driven by the need to replenish equipment used in Ukraine, NATO rearmament, and mammoth U.S. defense budgets.

These backlogs have helped drive enterprise value (market cap plus net debt) higher relative to earnings before interest, taxes, depreciation, and amortization (EBITDA).

However, a decade-long analysis of earnings before interest and taxes (EBIT) and EBIT margins shows that declining margins have challenged defense companies' ability to grow profits. Lockheed Martin's 46% increase in EBIT over the last decade (shown in the chart below) equates to less than 3.9% annual growth.

The profit margin challenges are possibly structural and lasting, driven by increasing technological complexity and mounting negotiating pressure from the U.S. government, notably on fixed-price development contracts and, in particular, pressure to deliver in a timely fashion.

Boeing's (NYSE: BA) defense business stands out. Although the fixed-price contracts account for 15% of the segment's revenue, they led to multibillion-dollar losses and charges.

The conflict with Iran has inevitably raised revenue expectations, but if margin pressures prove structural and lasting, are investors, in effect, betting on new conflicts to drive revenue expectations and defense budgets even higher? Are the current valuations justified for an industry that could struggle to grow earnings at more than an annual single-digit rate? Caution may be advised here.

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $434,524!*

Apple: if you invested $1,000 when we doubled down in 2008, you’d have $47,376!*

Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $503,861!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, available when you join Stock Advisor, and there may not be another chance like this anytime soon.

See the 3 stocks »

*Stock Advisor returns as of March 23, 2026

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Boeing, Honeywell International, and RTX. The Motley Fool recommends BAE Systems and Lockheed Martin. The Motley Fool has a disclosure policy.

Should You Buy Defense Stocks After the Iran Conflict Sent Them to All-Time Highs? was originally published by The Motley Fool