Lockheed Martin (LMT) Unit Wins $258M Deal To Offer F-35s

Lockheed Martin Corp.'s (NYSE:LMT) Aeronautics business division has won a modification contract to offer low-rate initial production of the 10th lot of F-35 Lightening II Joint Strike Fighter.

Contract Details

The contract is valued at $257.8 million and has been awarded by the Naval Air Systems Command, Patuxent River, MD.

Per the modification, Lockheed Martin will support the F-35 Joint Strike Fighter production by procuring 129 alternate mission equipment. Additionally, the company will provide 94 red gear − 44 for the Air Force; 11 for the Navy and Marine Corps; 39 for foreign military sales (FMS) and international partners. The contract includes procurement of 468 pilot flight equipment − 203 for the Air Force; 131 for Navy and Marine Corps; and 134 for FMS and international partners as well.

The modification includes 47.7% of the purchases for the Air Force; 15.6% for Marine Corps; 4% for the Navy; 23.4% for international partners; and 9.3% for FMS customers under the FMS program.

The work is scheduled to be completed by Jun 2020. Majority of the work related to this contract will be carried out in Inglewood, CA; while the rest will be performed in multiple locations across the U.S. The contract will use fiscal 2016 aircraft procurement (Air Force, Navy, Marine Corps); international partner; and FMS funds.

F-35 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. Currently, three variants of 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 for at least ten other countries.

Notably, the F-35 program has been supported by an international team of leading aerospace majors with Lockheed Martin being the primary partner. Evidently, Northrop Grumman Corp. (NYSE:NOC) contributed its expertise in carrier aircraft and low-observable stealth technology to this program, BAE Systems (LON:BAES) plc’s (OTC:BAESY) short takeoff and vertical landing experience, and air systems sustainment supported the jet’s combat capabilities. Moreover, Pratt & Whitney, a unit of United Technologies Corporation (NYSE:UTX) , provided F-35s with the F135 propulsion system, which is the world's most powerful fighter engine.

Our View

We remind investors that despite offering superior air security and stability, the F-35 program has been facing some engine-related technical issues for the last few years and has been repeatedly criticized by President Trump on being an overtly expensive project. In this context, Lockheed Martin finally signed a $8.5 billion deal with Pentagon this February with the intent of delivering 90 F-35s of the 10th Lot at a historically low rate either forced by Trump’s intervention or to keep management’s earlier promise to cut down cost by 6–7%,

To be specific, the 10th Lot represented a reduction of $728 million in costs compared with the 9th Lot’s production. Going ahead, Lockheed Martin's management is likely to adopt a cost-saving initiative to lower sustainment costs for F-35 by 10%, over the next couple of years. This, in turn, will result in cost savings of $1 billion over a five-year period. In fact, we believe the recent contract win will enable the company to take a step toward achieving its goal and allow it to provide more of these combat aircraft at an efficiently reduced rate.

Furthermore, with the U.S. government expecting to spend approximately $400 billion in the upcoming decades to develop and purchase 2,443 F-35 jets, and Lockheed Martin trying its best to effectively reduce the price of this program, the government may place larger orders. This, in turn, will boost the company’s profits in the near term.

Price Movement

Lockheed Martin's stock was up about 12.8% in the last one year, underperforming the Zacks categorized Aerospace/Defense industry's gain of 25.6%. 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. Also, budget deficits and political uncertainty make future defense budgets vulnerable to cutbacks.

Zacks Rank

Lockheed Martin currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here

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