Power Lunch - Dow tumbles, S&P 500 retreats from record as Walmart forecast raises earnings concerns 02/20/25

Episode Date: February 20, 2025

Stocks are retreating, following two days of all-time highs for the S&P 500, as investors dumped some popular names in the wake of a lackluster forecast from r Walmart that prompted questions about the outlook of the economy. We’ll cover all of the angles for you. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

She is Kelly Evans. I'm Brian Sullivan. Welcome to Power Lunch, everybody, as Walmart waxed the market. We're going to dive into what the retailer said. That is some concern. Plus, how Saudi Arabia has become the diplomatic go-to in peace talks and why it could impact the oil markets. And does President Trump really plan to cut defense spending? We have got a rare and exclusive interview with the CEO of Lockheed Martin. On a week when those stocks have really been under pressure. So let's start with stocks under pressure today. For sure, the Dow just off. Session lows down 600 points, about 1.3%. S&P faring better down about half that much similar for the NASDAQ. And Walmart is the worst percentage decliner on the index, but it's only taking less than 100 points off it right now. So it's not the major story. The Walmart chairs, that is a major story, down 6.5%. But look, Goldman also down 5%. That's having a bigger point

impact. So is Amex. J.P. Morgan, those companies are all lower as well. Those three names, in fact, are accounting for roughly half the Dow's losses today. Also, keep a big of the Dow's Keep an eye on the cruise lines getting crushed today. Commerce Secretary Howard Lutnik in an interview called them out as an example of companies that avoid U.S. taxes. Royal Caribbean is down about 8%. All the losses are big. These three are among the best performers in the S&P 500 over the past year. RCL has nearly doubled. And quickly, keep an eye. Also, Japanese yen, two-month high against the U.S. dollar. Bank of Japan is expected to continue hiking rates. Brian, those higher bond yields have been kind of an important upward source of pressure on global. bond yields. And we should, by the way, the Royal Caribbean, Norwegian, they're all welcome. Indeed. Is that a fair thing to say? Oh, yeah. We've talked. We've had great chats with them. Come anytime. We'd love to go. They want to come on, talk about this. You've got a muffin. We're ready to go. All right. We have got a lot to do this hour, but let's begin with the biggest retailer in America. That is Walmart. After a monster stock run over the past two years, Walmart losing money for

investors today, down more than 6%. Here's an RBI for you. Walmart, the single worst-performing retail stock in the market today falling more than five below or dollar tree. The big question, though, for you, where does Walmart and maybe the American consumer go from here? Well, it's a big question. We may have some answers and some clues from the earnings and call around at. CNBC's Melissa Repcoe. Joining us now with more on Walmart. Melissa. So Walmart today, like you mentioned, is feeling the pressure. And it's important to zoom out here because Walmart has seen such a tear with its stock. And really what's dragging down the stock in this case is it's forecast. It's forecasting a slower profit growth going forward.

And that's what investors don't want to hear. It's important to note that I spoke to a Walmart CFO, John David Rainey, and he said there has not been a frame of the consumer. That is not what's driving their guidance here. Instead, they're just taking more of a conservative approach. And Walmart is known for that in the past. It tends to set somewhat of a lower bar so that it can clear it and kind of play more of that prudent approach over time. That being said, it definitely has raised some alarm bells because Walmart tends to be the bellwether, and we have a bunch of other retailers on top with their earnings.

Is this a tariff story in any way? No, actually, John David Rainey mentioned they did not factor in tariffs to their forecast, so that didn't play a role at all. Worth also noting that two-thirds of what it sells is made or grown or assembled here in the U.S., mostly because of how large their grocery business is. So if that's not a direct impact, is it a weak consumer? Is it just that January is a weird month? But they're talking about later in the year, though.

They are. And what he said is really they're one month in and they're playing it safe. And so it's not so much to read into the consumer, but that they'd rather err on the side of caution here. Yeah, makes sense. Although, again, maybe they have some insight into that the rest of us don't. They did interestingly mention January was a weaker month because of the wildfires and because of weaker weather. But it still was a strong comp for them. The strongest year-over-year comp in the quarter, interestingly,

maybe because it was easier a year ago. So they're not noticing a slowdown in patterns. And in fact, they're noticing a bit of an uptick with general merchandise, which is the kind of discretionary stuff that people buy outside of the grocery aisle. He also spoke about how, you know, if he was to describe the U.S. consumer in a word, he said steady. So that might be something that investors may feel happy to hear. I feel like they're the new Apple.

Like they always come out and say something cautious. The stock goes down. All these stories are about the consumer, and then the shares go up 30% of the next time. Stock's been soaring. It's doubled. It's more than doubled in two years. The question is also, are they a victim of their own success? Because they have been on such a tear, the bar keeps getting raised. You know, and investors want to see even more impressive growth. So that's tough to compete against. And the stock trading, what do we say, 40 times earnings. Someone told me Costco's at 60 now, so these multiples are getting over. Everything's fine. One of the interesting storylines today, though, is that for the first time, Amazon has surpassed Walmart when it comes to quarterly revenue.

True. And so that's another little interesting story here. As Amazon surpasses Walmart, Walmart is trying to imitate Amazon in a lot of different ways. One of the biggest ways is that it's trying to make money outside of retail. It's doing things like advertising. It's third-party market. Voodoo. Exactly.

They're becoming a media mogul may be too strong. of a word, but Walmart's push into television and media and advertising is maybe one of the most underrated retail, and I'm doing air quotes from the radio, retail stories in America right now. The way they've tried to do that most recently is even partnering with Paramount, and that's a big perk for their Walmart Plus program, which was their answer to Amazon Prime. So if you say that imitation is the sincerest form of flattery, they're doing a lot of it, and they're looking at Amazon in many ways. The other way they're doing it is competing for upper-income shoppers, and that's what's driving the majority of their share gains.

Very point. And Amazon imitated Costco in the first place. So that's how the game's played. Landman and a Wopper Jr., Kelly. That's a Friday night for you. Melissa, thanks. Thank you. Not all gloom for retail. Some other retailers are actually seeing some pretty big gains over the past three months as well. Check out Tapestry, Ralph Lauren, urban outfitters, Walgreens, kind of discretionary as well. Here with the Roundup is Stacey Widlet's, president of SW Retail Advisors. So Stacey, what say you? What have we really learned today? Well, I think from Walmart, the biggest, and Melissa, she nailed it. She got it all. But I think the one extra thing to add in here is certainly that Walmart continues to gain share across all

incomes, but specifically higher income. This is a new Walmart. And as Brian said, of course, going into these higher margin, other categories like advertising that have legs. And I would say, you know, a four and a half comp on top of last year's four is nothing to be disappointed about. And certainly, yes, Walmart is cautious. They guided six below, below, six percent below the street. And that's how the stock is trading. But I'm still incredibly positive on the stock here. What do you make of these moves in some of the more discretionary names, like a tapestry, a Ralph Lauren and so on. Yeah. So Tapestry and Ralph have been absolutely on a tear. And a little bit, two stories, but a couple things they have in common. You know, during COVID, inventories were

lean. We didn't have any product. Everybody was paying full price. And for names like Tapestry and Ralph, we've said, okay, when is this going to end? When are, when our promotion's going to come back? They have not. For Ralph and Tapestry, average selling prices are up 10 to 12 percent this past quarter. That's incredible. So what they have proven once and for all and put all the naysayers to rest is higher operating margins for these two companies are sustainable. And the other thing they've been doing is pulling back on general headline promotions. Ralph Lauren deleted a bunch of promotions at December. That was your first clue. So I think they're both intentionally shaping their business to a sustainable,

higher margin at this point. Yeah, Henry Ford said what, you can get a Model T in any color you want as long as it's black, right? Because it was basically you have one choice. And I feel like where the retailers got smart, and you know, Stacey, my lovely wife has worked in consumer products for almost 30 years, where the idea that everyone would just over inventory and then discount, you'd kill margins. COVID changed all that. And you heard me say to Melissa

that maybe this Walmart pushing the media is an underrated story, I think right up there has to be that some, not all, some management teams have figured out. We're not going to discount anymore. And if you want discounts, go somewhere else. Yes, and also we've gotten so much better managing inventory.

Look at Walmart. Their inventories of 3% of styles are 5. So by nature, they're controlling the controllables. They are not allowing for these big discounts. And, you know, also these other brands that we talked about, Tapestry and Ralph, you know, they're pulling back from wholesale. Coach only has 11% exposure now. It's super low.

So they're controlling their destiny. Ralph Lauren's been shrinking it. And for the second quarter, they went positive in wholesale for the first time in a very long time. So again, like, look at these models, how they've changed since COVID. And they have staying power. Is there a management team you just really love? Ralph, I mean, I think they're doing a phenomenal job. TjX, I think both of these companies have just shown that these are by hold, you know, core holdings.

And, again, of course, Walmart and Costco. I mean, these are the core names. Yes, you can say the multiples are high, but, you know, the dividends are going up, the earnings are going up. And then you look at some other names, you know, that. have been very shaky, like Abercrombie. They haven't reported anything negative, but we have seen promotions rolling back in. So there are brands that have been able to hold their operating margins and not go back to promos.

And there are others that there's still a big question mark, is it sustainable? Real quickly, Stacey, before we let you go, what about Nike? Speaking of trying to transform the big splashy deal with Kardashian, they've never done something like that before. Yeah. And it's a great headline. And skims have done this with some other brands. but I don't think it's going to move the needle on Nike.

We've had a sell rating on the stock for a long time. And, you know, I'll tell you right now the data that we collect shows that the percentage of apparel on discount at Nike remains way up year, over year. So skims is great. Kim Kardashian wins again. Kim wins. I don't want to say Nike loses.

That would not be fair. Stacey for now, appreciate it. Thanks for joining us today. Thank you, guys. Stacey Widlet's SW Retail. All right, coming up, while all roads, now, apparently lead to Riyadh. Alim Kroff will join us live from Saudi Arabia next.

All right, welcome back. All diplomatic roads lead to Riyadh, at least right now. The U.S. and Russia holding Ukraine talks of the Saudi capital, and key energy players also meeting now regularly in Riyadh to talk about oil and OPEC and output. In a way, Riyadh for oil has become the new Vienna, where OPEC is based, which is why our friend and CBC contributor, Halim McClure. Croft is there right now, and she joins us. I know it's very late or your flights at a couple hours, Salima, either way, we do appreciate it very much. How has Saudi Arabia become sort of this

hotbed of diplomatic talks? And is it clear what they might want? What does the government of Riyadh want from this new world stage? I think Saudi Arabia wants no trouble in the neighborhood. I think they want a situation where they can de-risk these major conflicts. And what's interesting is we talk about Saudi Arabia and Riyadh, potentially being the new Vienna when they have energy meetings here. But they really have emerged as in New Switzerland, as you pointed out, you know, Secretary of St. Rubio is here, foreign minister Lava from Russia, having the first substantial U.S. Russia dialogue since the Russian invasion of Ukraine.

President Sisi of Egypt is in Saudi Arabia now as they come up with a collective response to the Gaza crisis and the Trump proposal to take Gaza. The Arab League has to come up with a counteroffer. They're discussing that now. And there's conversation about the fact that Saudi Arabia may play a role in crafting a solution to the Iran crisis, trying to get a new deal between Washington and Tehran that would stave off a potential Israeli strike on the Iranian nuclear facilities. potentially provide a path for sanctions relief for potentially both Russia and Iran. So a lot going on in Riyadh at the moment. It's more than just an oil story. All of this is happening at the same time that Saudi Arabia and the U.S., I guess I'll call them negotiations. We're talking about potentially

a trillion dollar, $500 billion to a trillion dollar investment by Saudi Arabia in the United States. At least that's what President Trump has talked about. But Ukraine not happy. They're not, they were not invited to these talks. As you frame it in the commodity markets, Halima, for oil and everything you and your team do as good or better than anybody out there, do you see it impacting output and prices? So these are two really important diplomatic stories for the oil market. So if you could get a Russia-Ukraine end-of-war scenario, everyone is starting to think about what does that mean? Does that mean we have the sanctions placed on Russian energy? We're are Russia molecules flowing back into their original home in Europe? That is what is under

consideration. But what is important is you mentioned Ukraine was not at the talks. Europe was not at the talks. And Europe just imposed additional sanctions on Russia, targeting the black fleet tankers, targeting ports that are involved in the Russian energy trade, taking banks out of the swift payment system. And so the question is, is Europe going to be compelled to remove their sanctions if they don't like the terms of the agreement. President Trump certainly has the power to pull back U.S. sanctions, though there is some congressional review process, but can he really compel Europe, which has imposed the bulk of the energy sanctions to remove their measures? And do they have to have a seat at the table? No. And so I think we have to separate

oil from gas. Oil has been subject to the most onerous EU sanctions. Gas, it's more an individual country and Russia decision. So is there a path back for individual member states to start taking Russian gas potentially? But oil is basically under EU sanction. And so that, I think, is going to be more challenging to remove those measures. And here's the dirty secret is that Germany for years, for decades, relied its entire business model was based in part on cheap, imported pipeline Russian gas. The Nord Stream and others, Nord Stream got blown up. But as we highlighted a couple weeks ago, the government of Denmark quietly allowing Russia to do some environmental work on the Nord Stream.

Right. See where that ends up. Could you see a day, Halima? Oh. When and if this war, thankfully is over. Let's just hope, on terms that Ukraine would agree to, I want to be very, very clear. Right. Where Germany goes back to pipeline Russian gas.

Brian, the issue is many European countries have faced de-industrialization because of higher energy costs. And I would pay very close attention to the outcome of the German election. Do we get a new government in Germany that says it is in our economic interest to take cheaper Russian pipeline gas or not be solely dependent on it, but allow some flows to return as opposed to investing in a massive, expensive LNG infrastructure buildout? So again, I would be paying very close attention to the outcome of those elections. Gas, I think, really does hang in the balance in a way that oil, I think, is a longer-term issue, whether those barrels return but gas, I think, it's a live issue. The frontrunner, Mertz, I believe, is he more hawkish on

Russia, Halima, or more dovish? Well, I think the question is now, I think it really becomes an economic argument right now. And as I look at industries moving to the United States for access to cheaper energy, I think that is a really important economic issue at home. And I Again, depending on the terms of the deal, again, will there be a push to resume some Russian flows for economic reasons? I think there is a case to be made for that. Well, it always a case to be made for having you won. Riyadh, Saudi Arabia, it's kind of where all the diplomatic roads and airlines have met up. Halema, I know you're going there now, so I appreciate your time.

Halima, thank you very much. Thank you so much, Brian. She called it the new Switzerland. Interesting. There's a lot going on, and Halima set a picture. There's the Russian plane is there. Marco Rubio is there. Egypt is there.

There's a lot happening. Europe and Ukraine not there. So that's critical. Of course, but it is the place to be for these talks. Speaking of energy, our next guest thinks it has the highest 12-month return potential of any sector right now. It's Mr. Carter Worth. Market Navigator is next. I didn't.

All right, let's get a quick check on the markets. They're down. They're down. The NASDAQ is down 6 tenths of 1%. The Dow is down 557 points. 1.25%, which is not nothing, but we've had worse. Now, generally, we've seen the markets go down bizarrely dumb to. This year, we have seen the markets go down pretty much only on Mondays and Fridays.

Tuesday, Wednesday, Thursday, we've been up. What's today? It's Thursday. It's Friday Eve. Thank you. But I don't think the market's supposed to go down today. Oh, that's a good one. Market doesn't care what it's supposed to do.

No, past performance doesn't dictate future performance. He said that before. Can you tell I used to be an RAA? That is very true. That's Dominic Chu, by the way, and it's time for market navigator. Yes, let's talk about what we're going to navigate through today, Brian, because energy stocks are where we're focused. They're off to a hot start in 2025.

The sector is trying to recover after being one of the weakest sectors in the last 12 months. So our next guest thinks that energy is poised for an upside breakout and could be the biggest winner in the next 12 months for the entire S&P. Joining us now to make sense of all of it is Carter Worth. He's the founder and CEO of Worth charting, a guy who looks at those charts and those patterns for a living, and he's got the spectacles on today, which means he's probably paying particular attention to all those ticks up and down. So take us through what the energy thesis is from a technical perspective and why it's,

in your mind, due for that big upside breakout. Sure, thanks, Dom. Brian, taking a break from the contacts, but yeah. So look, this has been a dud, as all we'll know, the past 10 years. In fact, the sector's up a mere 10, 15% where the S&P has doubled and obviously a massive underperformer over the past three years. But I think that's ultimately the opportunity. It's a high beta sector and yet a very small sector and only 3.2% of the S&P.

But let's get to it. Let's look at a chart or two and see what we can figure out together. And so what we know, of course, is it's a very important sector while small, but all of the charts would indicate that this sort of stall, this period of going nowhere, is likely at an end. And so what you see here is a two panel. The top is the S&P 500 energy sector itself, and the bottom is the energy sector's relative performance to the S&P.

So we've been going up 22, 23, 24, albeit barely. the relative performance is almost straight down. Now, let's look at this same two-panel chart another way, second iteration. And you'll see here, as I've annotated, that the presumption is energy on top is going to break out from this two-three-year range. And then that would also, I would see a concomitant move in the relative performance. So let's zero in if we could on just the top panel and look at what is a chart of the S&P 500 sector itself. And you'll see here on this next. that what we have is a classic setup for something that's had a big move. I mean, a massive outperformer since the COVID low, having been a disastrous underperformer

going into COVID, that now after three years of sideways to my eye, by my work, is poised to break out. Okay. So that relative outperformance could lead to, again, outsized gains for the broader energy sector. But are there places in particular that you go to specifically that could be the outperformers even within that possibly outperforming sector? Yeah, I mean, two favorites, Exxon, by virtue of the fact that it has been so dormant,

very similar to the sector itself, but is really a safe haven asset within the sector and the largest. And then LNG, liquid natural gas, a nice symbol there for Schneer. And the presumption here is that this, having been one of the strongest stocks, recently, has dipped almost 20%, and the dip looks to be a buying opportunity. All right. So is there anything that we could say policy why? I mean, you're not a policy fundamentals guy necessarily. But what would happen in your mind that could make this whole thing go off the rails? I don't know. I mean, I'll default to what you just said. It's just not a part of my work. There are a lot of people spending time on politics and policy and studying OPEC and studying that. I know one of those people. You're one of them. I think we, and we just talked about it with Halima.

Could I answer your question? I don't know. I'll just answer the question. I would say this. What could make it go off the rails? What Halima just talked about. If we see an end of this war, which lists all hope we do, by the way, an end that both sides would agree to, that if Russia comes back online, the sanctions go away, Trump's talking about drill baby drill.

Could we see $40 or $50 oil and natural gas fall a ton? Because suddenly now there's so much more supply on the market. that would impact both of Carter's names, Exxon and Schneer, for very different reasons. All right, there you go. So, again, Carter, thanks for the charts. And Brian, thanks for the fundamentals. I'll be on Fast Money tonight, 5 p.m. Actually, I'm hosting the show tonight.

Working hard. What are you doing it? I hosted it last night. I was holding the seat. It was fantastic, by the way. I loved every minute of it. Thank you. I hosted it last night.

Yes, he did. Melissa is enjoying some. Where is Melissa, by the way? Well, well-deserved time. Who gets time off? Who works harder than her? Not a lot. You do, Kelly, you do.

No, no, no. Meantime, Palantir is having another down day. It's on pace for its worst two-day stretch since May of 2022, but it has still quadrupled over the past year. We'll get our traders take in free stock lunch next. Welcome back to Power Lunch on Pippus Stevens with your CNBC News Update. The full Senate voted moments ago to confirm Cash Patel as the next head of the FBI. The 51 to 49 vote place.

him at the helm of an agency he has fiercely criticized in the past. He faced criticism during the confirmation process over his unwavering support of the president and his lack of experience. A source familiar with the situation says New York Governor Kathy Hochel will not remove New York City Mayor Eric Adams from office at least for now. She is set to announce this afternoon that she will instead impose strict guardrails on his administration. It comes after Adams was indicted last year on corruption charges.

And as the Justice Department seeks to drop those charges in the bid to help the federal government on immigration enforcement. And New York State Attorney General sued 13 vape makers, distributors and retailers today, saying they are fueling a teen epidemic. The complaint, in part, accuses popular brands, including Puff and Elf Bar, of continuing to sell banned flavored products in the state. The lawsuit seeks hundreds of millions of dollars and damages from the companies. Kelly, back to you. I will keep an eye on those names. Pippa thanks. And it's time for three-stock lunch, where we hit three different movers and give you the insight on how to trade them. Here with our trades today is Sylvia Jablonsky. She is CEO and co-founder of Defiance ETFs.

Sylvia, I should say, good to see you again. Got to start with Palantir. Two-day, big decline. The CEO, Alex Carp, has been selling a lot of shares. It has people wondering, of course, about what's going to happen down 7% today on concerns about defense spending as well. What do you do with it? It's still up 300% in a year. Hi, Kelly, thanks for having me. Well, I think, you know, this news about Alex Karp. They had a $10 million

plan. He has about 1.8 left. And then we heard about the cut in defense spending about $290 billion. I think that this is short-term news, right? I think the sale is just that he's over-concentrated in one stock that has made him incredibly wealthy and others incredibly wealthy and they're diversifying. They have a unique proposition here. They're at the cross-section of AI, of government, of data and analytics. They're the premier AI defense company. You know, they're, they're involved with Elon Musk's XAI. He's involved with their president. I think that's a good place to be. Partnerships with Anthropic, drones. You know, this is the defense AI company. And I think that any dip for Palantir is a dip for me. I'm a buyer here. Well, what about Hasbro? Soaring on some good results

in a $1 billion savings plan. So will your take on Hasbro. Yeah, the little Paul Tuckett, Rhode Island company here. I think, look, they've hit it out of the park with earnings. I think that's great. They have a good story here. They're going to, you know, take 50% out of China. I think that helps. They're projecting single-digit profit growth, inclusive of tariffs and things like this. For me, you know, I look at it last year. It was 15% versus S&P 500. So underperform that 22.3. They're up 8% versus 4, so they're doing well. This is a company in which I think I would take the gains Today, you know, I kind of love what they did with the earnings season, but I'm not super excited about single-digit growth. Had the company fallen on earnings because of the single-digit

growth, I probably would have bought if it was, you know, an 8 to 10% dip. But take your gains here, be happy with it and wait for a dip. That brings us to Carvana, which is dropping today, but very similar story to what we mentioned earlier. It's up 350% in a year. Analyst, do you want a little more clarity of the company's forward guidance. It's down 14%. What are your thoughts? Yeah, and I think this is another one, another momentum play that's taking it on the chin a little bit today. So, you know, they have gross margins are down per vehicle by about $1,000 or so. I think the outlook is a little bit unclear in terms of, you know, they gave positive guidance,

but without any kind of detail around it. But I like this company. I think it's another tech company. Yes, they're in the world of used cars, but they use AI, they use e-commerce, they use technology, to do this cheaply and efficiently. They're revolutionary, disruptive in the sector, and I think that this is a company that's here to stay. So it's another one that I would buy on the dips.

And Q4 looked pretty good for this company, right? I mean, revenues up 46% or so. You know, net income is good. I think that there, again, just any kind of disruptive technology in an old traditional industry, I think has some legs to come in our future. All right, Sylvia, appreciate it today.

Sylvia Jablonski with Defiance ETFs. All right, coming up. Is Donald Trump really considering a cut in defense spending? A rare and exclusive interview with the CEO of defense giant Lockheed Martin. All right, welcome back. Quick check on the markets and your money. We're seeing declines across the board. The doubt down about 570 points, a NASDAQ, down by about three quarters of 1%.

Inside the market, some of the stocks that have been really powering higher on momentum, App Lovin, Robin Hood, Hems and Hers, they're all down. today. Applovens down 13%. Robin Hood, Hems and hers down 6 and 7%. Of course, these stocks have soared over the last year or so. Important to keep that in mind. Also watching Bitcoin today, it is getting back

toward $100,000 per Bitcoin. It's at 98,305. President Trump reiterating his plan to make the U.S. a global capital of crypto. And coming up, our exclusive interview with Lockheed Martin, Chairman and CEO Jim Taitland.

Looking forward to that. Stay on. Welcome back to Power Lunch. Defense companies have turned higher today, but late yesterday, Defense Secretary Pete Hegseth told the Pentagon to get ready for budget cuts of maybe as much as 8%. Markets likely anticipating this as the major defense names are down 15 to 20 percent since the president was elected in November. That includes Lockheed Martin, down about 20 percent. And the CEO is with Morgan Brennan Now for a rare exclusive interview. Welcome to you both. Morgan? All right, Kelly.

Thank you. And Jim Takedauchlet of Lockheed Martin, it's great to have you on. Welcome to you as well. That's exactly you want to start because the Trump administration is looking to cut the budget. It's looking to set its priorities from military modernization. We know that from a statement from the Pentagon today. What do you expect and how are you positioning for it? Well, we're expecting, Morgan, is similar to other presidential transitions where the new incoming administration wants to look at the priorities of the prior administration, see what the alignment is with their own priorities coming. into office and then make adjustments as they see fit. So this is a fairly typical process that our industry grows through. The way it was described in the government's public statements was it was going to be a realignment of resources. And so we expect to be in a really great position for that realignment, given the kind of missions that we can execute, the kind of capabilities we have at our company and the kind of partnerships we're building with tech companies and others in the ecosystem to deliver on all that. So I'm pretty, very optimistic, actually, about streamlining

government processes along the way and getting more efficient. So we look at all this is positive and good environment to work in. Okay. Speaking of getting more efficient, defense stocks and government IT stocks have been under pressure since the election. Analysts point to Doge. Is Wall Street right to see Doge as a threat? I actually don't think it is a threat. And Morgan, you know, I've had numerous conversations over the last four years that I've been in this role after having about 20 years in the telecom tech industry that I've been advocating for systemic change on how the government and industry broadly interrelate when it comes to national security. And I think the Doge, also the president's new team, a bunch of people with new ideas and an open mind, including

the president himself, will enable us to finally get that systemic change going in this country. our allies to have a more effective and efficient national defense. So I'm encouraged by this and I'm looking forward to working with them. Yeah, and you and I've had these conversations, 5G.mill, 21st century warfighter, some of the commercial partnerships you've struck with companies like Microsoft and Invidia to name a few. So it does raise the question. If we're talking about systemic change, what does that change actually need to look like and how much does Lockheed's business model need to change alongside it? They're very specific. I'll just highlight two of them today, very specific policy changes that if they're made in government, industry will be able to

become more effective and more broadly participating in these national defense missions. So one of them is creating a standards body for an open architecture system based on the 5G. .mil concept, similar to what we do in telecom, it's called 3GPP. That's the acronym in telecom. 5G.mill. I mean, love the government to adopt that concept and implement it by convening the companies that are in the aerospace defense industry and the tech industry and telecom, startups to create a standards body where we all can participate, plug and play with the newest and best technologies that evolves on both the software and hardware side. So that's one of those two.

So we've seen, we've seen, it raises the question about competitive landscape. Now we've seen Palantir is now the most valuable defense contractor in the public markets. You've got Andrel Industries, SpaceX, a flurry of other defense tech startups that are raising seamlessly endless amounts of capital in the private markets. Is there a changing of the guard? How to think about this competitive landscape and what it means for Lockheed? Well, I would suggest that Palatier and Andrels and others investors, including SpaceX, they're just trying to get ahead of the systemic change that I'm talking about, which is reducing,

here's the second part of the discussion. So the standards body, open architecture, 5G-based internet of things, that system is one, as I mentioned. Secondly, there needs to be an adjacent acquisition system in each of the armed services in the Pentagon for digital services. There's an acquisition system that everyone's well aware of. It's a long cycle. It could be faster. It could be more efficient.

But even if you left that alone, the system that buys aircraft and ships and submarines and big satellites, we still need to create, we should improve it, but we still need to create a digital services system, a acquisition process that aligns with that bigger process, maybe pulls about 5 to 10% of the defense acquisition and R&D budget over to these services, and buy like the tech industry sells, long-term contracts, subscription business model, no-cost-based pricing, and those kinds of attributes of how the tech industry interrelates with each other and with other industries. We need to bring that to the Pentagon, and that's the second big systemic change that's needed, that'll enable the companies that you just talked about

and ours and Northrop and Boeing to all be participating on this faster, more iterative software track where we can either partner subcontract to or from any of those companies and we'll be able to work together to put the big platforms together with the best software and that way we'll have the most effective national defense. So I think this is really critical. And I welcome these companies and their investors and their talented people into this ecosystem so that we can just create a better deterrent to armed conflict among great powers. That's what we really want to do. I'm glad they're around. I'm glad their investors are here. You know, Lockheed has dozens of production sites around the country. You employ many thousands of

workers at those sites. That doesn't even include all the suppliers that are funneling into the many weapons programs that you have your hand in. If you have a defense budget that at least here in the U.S. that's under pressure. If you have a shift in business model and a shift towards more tech and more software, what is it going to mean for production? What is it going to mean for jobs? We've tried to get ahead of these trends ourselves. And so inside our own company, Morgan, all of those big platforms that you know that we make, and you see on the map here, Palmdale, California, we make the latest stealth aircraft. Fort Worth, we build the F-35, Greenville, the F-16, area editor to C-130. This is just our aeronautics group, as you show on the chart. But within that,

and within the other four businesses we have in our company, we've been creating that 5G.mill architecture. We've been creating our own standards. And so we'll be able to interconnect all of those aircraft and lots of other systems like radars and satellites into this kind of architecture. So we'll still have to produce these big sophisticated systems because they're the only ones that competitive against the threats, whether it's China, Russia, Iran, certainly on the side of China and Russia. They are off to the races on fifth generation aircraft. They're building them. They're trying to come up with the sixth generation, as are we. And so we've got to stay in that competition because there's really no effective counter when you're trying to get air superiority

to a fourth or fifth generation fighter jet that I'm aware of today that we can just field instantly that isn't along the lines of those kind of aircraft. So we're going to have to do both. Build the aircraft, build the big platforms, accelerate the technology that's digital. AI's got to be a big part of this, and it is in our company. In fact, we've got a thousand AI scientists

in our own company working on this. We need to get a big tent together with all these companies that you've been talking about and others that we can have contribute to all this. But you've got to have those platforms to compete. Okay. geopolitical landscape, you just touched on it. It's shifting rapidly, in part because of trade policy, in part because of foreign policy.

Case in point, what we're seeing play out in real time with Ukraine. If we get a resolution to that conflict, what will that mean for Lockheed? And I ask that knowing that you supply a lot of missiles and missile defense and indirectly F-16s to that conflict. Yeah. I do hope personally and even professionally that the Ukraine war can be ended quickly and fairly. what the outcome of that war, even if it ends tomorrow, which we all hope will happen, it just heightens the need for the ability to the defense production system to scale and be able to produce what we need to. It accentuates the need to have faster turnaround times on digital technology, which Ukrainians are doing, even overnight.

And it also emphasizes the need to have partners, international partners, that you can team up with. And we have them, like Germany, UK, Australia, Italy, others, where we co-produce and work with them to get their best technology involved in their talent, and their employee bases involved, in producing what we all need to do to defend ourselves and deter further on conflict. So I hope the conflict ends fairly and quickly, but the lessons from it, I think, are for better or worse, they're going to live on. We need to get more effective at national defense. That's the real lesson, I think, of the Ukraine war.

We just weren't ready four years ago, three, four years ago to really meet a challenge like this. Okay. And that's the big learning. Yeah. And certainly we've seen this surge in international demand for defense products. And that's been a piece of your sales that's been growing particularly quickly. Just speaking of missile defense, Iron Dome for America, we have this executive order out. We know there's legislation that's starting to percolate around this as well.

Do you plan to participate in that competition? and where do your products fit in? Well, we absolutely plan to participate. We're offering to lead a national team to help the government organize industry to make this Iron Dome concept of reality. And our company specifically will contribute some very big pieces of this, we think.

The first one is satellite sensing of missile launches and tracking that can be done from space, and we do from space today. Other companies do too. So how do we get ours and those assets together in the most effective way.

All right. The second big, big piece of this is command and control systems, which we build for the U.S. government and others. Australia just basically put in a command of control system for their version of Iron Dome that will include all these kinds of capabilities. We've already done this in Australia. We're doing it in Guam and in the Pacific. Okay.

I think we can help leave that as well. Jim, we got to leave it. We got to leave it there. Jim take a lot of Lockheed Martin. Thank you so much for joining me. Back to you. Always great, Morgan. Bye. Great interview, Morgan. Thank you for bringing it to us. We are back right after this. Thanks for watching, Power Lunch.

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