Italian Problem For Lockheed F-35

Zacks

Trouble for Lockheed Martin Corporation’s (LMT) largest program, F-35 Joint Strike Fighter, is mounting. Per media reports, Italy is contemplating scaling back its F-35 order of 131 units to 101. The grapevine is abuzz that Italian Prime Minister Mario Monti plans to shore up public accounts by reducing defense spending and F-35 comes across as a lucrative target for that.

Earlier, on Monday, President Obama submitted the fiscal 2013 U.S. budget proposal to the Congress. The proposal suggests a deduction of $1.6 billion at one go from the F-35 program by eliminating 13 planned aircrafts. It provides $9.17 billion for 29 F-35 aircrafts, two fewer than what were sanctioned for fiscal 2012.

The budget proposal may also delay the procurement plan under the F-35 program, reducing its planned purchase order from 423 to 244 during the period between fiscals 2013 to 2017. The U.S. Defense Department estimates that this would bring in a total of $15.1 billion in savings.

Any cuts in the F-35 program would greatly affect the fortunes of the world’s largest stand-alone defense company, Lockheed Martin. The F-35 is the Pentagon’s biggest weapons program, at an estimated cost of $382 billion, for the development and purchase of planes.

However, we believe market pessimism is fully accounted for in the current valuation of the defense behemoth, which is priced at a discount to both industry peers and the overall market. Over the longer run, we expect the company to register a stable performance thanks to a leveraged presence in the Army, Air Force, Navy and IT programs. Also, shareholder return will continue to be shored up by the company’s focus on debt repayment, its ongoing share repurchase program and the incremental dividend.

We also believe that all the above-mentioned positives have already been taken into account in the current share price. Thus, we currently remain on the sidelines on Lockheed Martin due to U.S. economic fundamentals being kept on a leash as the Euro-crisis continues. Given the budgetary cuts and overall scenario, it would not be too pessimistic to advise investors to adopt a wait-n-watch approach for the defense and aerospace goliath. This justifies the Zacks #3 Rank, which translates into a short-term “Hold” recommendation.

Considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock. This is in sync with its peers like The Boeing Company (BA) and Northrop Grumman Corporation (NOC).

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