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Lockheed Martin (LMT) Unit Wins $373M F-35 Lightning II Deal
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Lockheed Martin Corp.’s (LMT - Free Report) Aeronautics Co. business division has won a modification contract from the U.S. Navy. The original advance acquisition contract involved low-rate initial production of Lot 10 F-35 Lightning II.
Contract Details
The contract is valued at $372.9 million and was awarded by the Naval Air Systems Command, Patuxent River, MD.
Per the latest modification, Lockheed Martin will procure F-35A and F-35B variant aircraft that covers deficiency corrections for non-U.S. Department of Defense (DoD) participants.
The work is scheduled to be completed by Mar 2020. Majority of the work will be executed in Fort Worth, TX; while the rest will be performed in El Segundo, CA; Warton, UK; and various other places across the U.S. The contract will use non-DoD participant funds.
F-35 Lightning II Attributes
Lockheed Martin’s F-35 Lightning II is a single-seat, single-engine, 5th Generation fighter aircraft, which comes with an advanced stealth feature combined with enhanced fighter speed and agility, fully fused sensor information, network-enabled operations and advanced sustainment. Three variants of the F-35 are set to replace five fighter jets for the U.S. Air Force, Navy and Marine Corps, as well as a variety of fighter jets in at least 10 other countries.
With Lockheed being the primary partner, the F-35 program has been supported by an international team of leading aerospace majors. While Northrop Grumman Corp. (NOC - Free Report) contributed its expertise in carrier aircraft and low-observable stealth technology to this program, BAE Systems plc’s (BAESY - Free Report) short takeoff and vertical landing experience, and air systems sustainment supported the F-35 jet’s combat capabilities. Also, Pratt & Whitney – a unit of United Technologies – provided this fighter aircraft with the F135 propulsion system, which is the world's most powerful fighter engine.
Our View
F-35 is the world's largest defense program built by some of the leading companies in the aerospace-defense space. To date, the U.S. government has awarded low-rate initial production contracts for smaller batches of F-35 jets, partly because of the huge costs associated with it.
It is interesting to note that in spite of gaining considerable traction across the globe for providing superior air security and stability; the F-35 program has been grappling with some technical challenges over the past few years. It is imperative to mention in this context that although this jet’s engine has led to a few delays, it was announced that engine removal for maintenance – a key measure of engine reliability – is over 90% and hence is not required until 2020.
In terms of price, F-35 was criticized by President Trump who has been repeatedly tagging this project as “overtly expensive”. In fact, in Jan 2017, Trump claimed that his intervention has forced the company to slash the cost of 10th batch F-35 jets by $600 million. Although Lockheed Martin’s management never confirmed to this proclamation, in Dec 2016 it had announced plans to cut down cost by $550−$630 million or in the range of 6–7%.
Finally, in February, the company won a DoD contract worth $8.5 billion for the production of 90 F-35 fighters of the 10th batch at a lowest price to date, when compared to this program’s prior contract value. This indicates that Lockheed Martin has eventually acted on the cost-cut plans for F-35 as proposed by the President. In fact, later in March, the company’s CEO Hewson also admitted that President Trump’s persistent involvement in cutting cost of F-35 did have a major influence on this program’s cost-saving initiative.
One may expect that such cost reductions might hurt the company’s growth trajectory. However, considering the factors that are expected to favor Lockheed Martin, it is unlikely that the world’s largest defense contractor will suffer any setback, at least in the long term. Notably, the company expects to increase its delivery of F-35 jets by over 40% year over year in 2017, plans to cut sustainment costs for F-35 by $1 billion over next five years as well as the U.S. government plans to spend approximately $400 billion in the upcoming decades to develop and purchase 2,443 F-35 jets. We believe, these moves are likely to benefit the company over the long haul.
Price Movement
Lockheed Martin’s stock has improved about 19.8% in the last one year, underperforming the Zacks categorized Aerospace/Defense industry’s gain of 25.7%. This could be because the earlier budget cuts have put pressure on the top line although the present defense budget is more in favor of the sector. Budget deficits and political uncertainty make future defense budgets vulnerable to cutbacks.
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Lockheed Martin (LMT) Unit Wins $373M F-35 Lightning II Deal
Lockheed Martin Corp.’s (LMT - Free Report) Aeronautics Co. business division has won a modification contract from the U.S. Navy. The original advance acquisition contract involved low-rate initial production of Lot 10 F-35 Lightning II.
Contract Details
The contract is valued at $372.9 million and was awarded by the Naval Air Systems Command, Patuxent River, MD.
Per the latest modification, Lockheed Martin will procure F-35A and F-35B variant aircraft that covers deficiency corrections for non-U.S. Department of Defense (DoD) participants.
The work is scheduled to be completed by Mar 2020. Majority of the work will be executed in Fort Worth, TX; while the rest will be performed in El Segundo, CA; Warton, UK; and various other places across the U.S. The contract will use non-DoD participant funds.
F-35 Lightning II Attributes
Lockheed Martin’s F-35 Lightning II is a single-seat, single-engine, 5th Generation fighter aircraft, which comes with an advanced stealth feature combined with enhanced fighter speed and agility, fully fused sensor information, network-enabled operations and advanced sustainment. Three variants of the F-35 are set to replace five fighter jets for the U.S. Air Force, Navy and Marine Corps, as well as a variety of fighter jets in at least 10 other countries.
With Lockheed being the primary partner, the F-35 program has been supported by an international team of leading aerospace majors. While Northrop Grumman Corp. (NOC - Free Report) contributed its expertise in carrier aircraft and low-observable stealth technology to this program, BAE Systems plc’s (BAESY - Free Report) short takeoff and vertical landing experience, and air systems sustainment supported the F-35 jet’s combat capabilities. Also, Pratt & Whitney – a unit of United Technologies – provided this fighter aircraft with the F135 propulsion system, which is the world's most powerful fighter engine.
Our View
F-35 is the world's largest defense program built by some of the leading companies in the aerospace-defense space. To date, the U.S. government has awarded low-rate initial production contracts for smaller batches of F-35 jets, partly because of the huge costs associated with it.
It is interesting to note that in spite of gaining considerable traction across the globe for providing superior air security and stability; the F-35 program has been grappling with some technical challenges over the past few years. It is imperative to mention in this context that although this jet’s engine has led to a few delays, it was announced that engine removal for maintenance – a key measure of engine reliability – is over 90% and hence is not required until 2020.
In terms of price, F-35 was criticized by President Trump who has been repeatedly tagging this project as “overtly expensive”. In fact, in Jan 2017, Trump claimed that his intervention has forced the company to slash the cost of 10th batch F-35 jets by $600 million. Although Lockheed Martin’s management never confirmed to this proclamation, in Dec 2016 it had announced plans to cut down cost by $550−$630 million or in the range of 6–7%.
Finally, in February, the company won a DoD contract worth $8.5 billion for the production of 90 F-35 fighters of the 10th batch at a lowest price to date, when compared to this program’s prior contract value. This indicates that Lockheed Martin has eventually acted on the cost-cut plans for F-35 as proposed by the President. In fact, later in March, the company’s CEO Hewson also admitted that President Trump’s persistent involvement in cutting cost of F-35 did have a major influence on this program’s cost-saving initiative.
One may expect that such cost reductions might hurt the company’s growth trajectory. However, considering the factors that are expected to favor Lockheed Martin, it is unlikely that the world’s largest defense contractor will suffer any setback, at least in the long term. Notably, the company expects to increase its delivery of F-35 jets by over 40% year over year in 2017, plans to cut sustainment costs for F-35 by $1 billion over next five years as well as the U.S. government plans to spend approximately $400 billion in the upcoming decades to develop and purchase 2,443 F-35 jets. We believe, these moves are likely to benefit the company over the long haul.
Price Movement
Lockheed Martin’s stock has improved about 19.8% in the last one year, underperforming the Zacks categorized Aerospace/Defense industry’s gain of 25.7%. This could be because the earlier budget cuts have put pressure on the top line although the present defense budget is more in favor of the sector. Budget deficits and political uncertainty make future defense budgets vulnerable to cutbacks.
Zacks Rank
Lockheed Martin currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Looking for Ideas with Even Greater Upside?
Today's investment ideas are short-term, directly based on our proven 1 to 3 month indicator. In addition, I invite you to consider our long-term opportunities. These rare trades look to start fast with strong Zacks Ranks, but carry through with double and triple-digit profit potential. Starting now, you can look inside our home run, value, and stocks under $10 portfolios, plus more. Click here for a peek at this private information >>