The U.S. defense majors faced with a severe crunch in the domestic defense budget are looking for more international orders to maintain their revenue stream. Lockheed Martin Corp. (LMT) has clinched a sizeable $6 billion plus deal from the Dutch defense ministry for its F-35 fighter jet. This is a major achievement both for the company and Washington as well.
In the budget for 2014, the Dutch government announced its intention to procure 37 Lockheed Martin F-35 fighter jets to phase out its mature F-16 fleet. The government had initially planned to purchase 85 F-35 jets.
For the replacement plan, the government has set aside an investment budget of 4.5 billion euros (US $6.01 billion) added to the F-16 operating budget of 270 million euros. This equates to a total of roughly $6.4 billion. The F-35s will enter service in 2019, finishing by 2023, by which time the F-16s will be phased out.
The F-35 possesses 5th Generation characteristics comprising radar evading stealth, supersonic speed and extreme agility with the most powerful and wide-ranging integrated sensor package of any fighter aircraft in history.
However, Lockheed Martin’s F-35 program has been mired with controversy because of development delays and cost over-runs, 70% above projection. The announcement has inevitably raised a debate in the Netherlands amidst an environment of economic austerity.
Mounting costs of the F-35 had prompted some Dutch officials and other industrial partner countries, like Denmark and Canada, to suggest other alternatives like The Boeing Co.’s (BA) F/A-18 E/F Super Hornet, Gripen from Saab of Sweden, or Eurofighter from EADS, which is a European consortium led by European Aeronautic Defense and Space.
To date, the U.S. military is the largest customer of the F-35, with over 2,400 of these jets ordered for its three military services, at a staggering cost of $392 billion. The Netherlands now becomes the seventh country following Britain, Australia, Italy, Norway, Israel and Japan with firm commitments to purchase the F-35.
Lockheed Martin is the largest defense contractor in the world. The company’s customer base includes the U.S. government, international governments and other commercial buyers.
The company and other defense behemoths are gradually looking to diversify their presence in order to generate more sales in the face of domestic budget austerities and sequestration. The latest deal will drive the top-line growth momentum at Lockheed Martin. The U.S. Department of Defense has already planned to cut its spending level by $500 billion over the next 10 years. This is on top of the $487 billion in cuts that were already planned for roughly the same period.
Lockheed Martin presently retains a short-term Zacks Rank #1 (Strong Buy). Other well-placed operators include Northrop Grumman Corp. (NOC) and Raytheon Co. (RTN), both with a Zacks Rank #2 (Buy).
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