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Lockheed Martin Wins $20M Navy Deal for Work on F-35 Lot 15

Zacks Equity Research

Lockheed Martin Corp.’s LMT business unit, Aeronautics, has won a modification contract from the U.S. Navy to procure work on the aircraft memory system and panoramic cockpit display. This work will help to recover diminishing manufacturing sources limitations that are projected under 15th Lot production of F-35.

Contract Details

The contract is valued at $19.8 million. It was awarded by Naval Air Systems Command, Patuxent River, MD.

The modification includes 40% of the work for the Air Force; 20% for the Navy, Marine Corps and international partners each.

Work is scheduled to be completed by Mar 2019 and will be performed in Fort Worth, TX. The contract will use fiscal 2016 research, development, test and evaluation (Air Force, Navy, Marine Corps); and international partners 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. 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.

With Lockheed Martin being the primary partner, the F-35 program has been supported by an international team of leading aerospace majors. Notably, Northrop Grumman Corp. NOC contributed its expertise in carrier aircraft and low-observable stealth technology to this program, BAE Systems plc’s 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 UTX, provided F-35s 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. Till 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.

Notably, 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”. Toward this end, 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. We note that the company expects to increase its delivery of F-35 jets by over 40% year over year in 2017. Also, it plans to cut sustainment costs for F-35 by $1 billion over next five years, besides 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 was up about 18.1% 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. We believe that budget deficits and political uncertainty might 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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