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Lockheed Set to Win F-35 S. Korea Deal

Zacks Equity Research

The world’s largest stand-alone defense contractor, Lockheed Martin Corporation (LMT) is expected to win a sizeable contract from South Korea for 40 of its F-35 Joint Strike Fighters. Although South Korea's Defense Ministry did not clearly specify Lockheed Martin as the winner, the country’s need of the hour to beef up its stealth capability leaves the company’s F-35A stealth jet as the only viable contender in response to North Korea’s growing nuclear threat.

Per the impending contract, South Korea intends to buy 40 jets, instead of the original 60, to stay within the budget cap. Media reports indicate that South Korea might negotiate with The Boeing Co. (BA) and Eurofighter — a consortium led by European Aeronautic Defense and Space — for the 20 more fighter jets as per the original plan.  South Korea’s Defense Ministry also stated that the country requires 50 to 80 new jets between 2017 and 2028 as Seoul is looking to replace its ageing F-4 and F-5 fighters.

Earlier, South Korea had opted for Boeing’s economical F-15 Silent Eagle (F-15SE). Lockheed Martin’s F-35 and Eurofighter’s Typhoon were over budget, thereby missing the eligibility mark.

However, the pressure to invest in more advanced fighter planes has compelled the South Korean government – which had set the budget cap of 8.3 trillion won or $7.8 billion – to reconsider the case. In September, Boeing’s F-15 Silent Eagle was finally rejected on grounds of not having enough stealth capabilities.

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. The plane has been ordered by Australia, Britain, Israel, Italy, Japan, the Netherlands and Norway.

The defense major’s F-35 fighter jet engines are made by U.S. based Pratt & Whitney and U.K.’s BAE Systems as its main international partner. It also includes Northrop Grumman Corp. (NOC) and United Technologies Corp. (UTX) as partners on the F-35. This program, which now accounts for 15% of Lockheed's total revenue, has faced years of delays due to technical setbacks and cost overruns. This has led some of its cash-strapped customers, including the governments of U.K. and Canada, to cut or reconsider their orders.

Currently, an F-35 costs around $115 million. However, the Pentagon and Lockheed Martin are looking to lower the cost of building and operating each aircraft by increasing the production level.

This deal from South Korea for its super stealth fighter would mark a crucial victory for Lockheed Martin in response to Pentagon’s budget cuts and delay in buying new jets. So far as countering the adverse effects of defense budget cuts and sequestration, the share price of Lockheed Martin hit a 52-week high of $140.94 on Nov 22.

Lockheed Martin currently retains a Zacks Rank #2 (Buy).

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