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Will Trump's Victory Spell Doom for Lockheed Martin's F-35?

The most expensive U.S. weapons program in the world — Lockheed Martin Corp.’s LMT F-35 has been in the headlines for quite some time, on account of consistently underperforming in key tests. Michael Gilmore, director of operational test and evaluation of the Department of Defense (“DoD”), who raised doubts regarding this program earlier, recently blamed Pentagon officials of preparing a deceptive review of its progress.

The controversial statement came after President-elect Donald Trump slammed aerospace giant The Boeing Co. BA on Twitter for developing an costlier version of the Air Force One on Dec 6. In his tweet, he urged the federal government to cancel an order with Boeing, which included the remodeling of 2 Air Force One planes as the costs associated with the project were deemed “out of control”. (Read more: Will Trump's Tweet Hurt Boeing's Air Force One Deal?)

Earlier too, Trump had raised questions related to the F-35 program. In an Oct 2015 interview, Trump criticized the fighter jets’ cost and said that other existing planes are much better in comparison.

Other Officials’ Questions on the F-35

On Nov 3, Senate Armed Services Committee Chairman John McCain, an Arizonian Republican, questioned Defense Secretary Ash Carter in a letter about the delays related to the F-35 Lightning II.

In response to McCain’s question on when the Pentagon could complete the System Development and Demonstration (“SDD”) phase of the F-35, the Pentagon admitted that it was scheduled to end in the beginning of 2018. In response to questions regarding operational combat testing, the Pentagon said that it would start the process in mid 2018 and expects it to be completed in a year.

Gilmore’s Take

Gilmore, who had sent a letter to Deputy Defense Secretary Robert Work on Nov 18, raising concerns about the F-35, said that the aforementioned draft answers should “be revised to provide clear, accurate and complete answers.” Further, on Nov 28, he wrote a criticizing memo to Frank Kendall, undersecretary of defense for acquisition, urging him that if the responses are not modified, they would be considered misleading or deceptive, and could possibly lead to conflicts with the Congress.

Gilmore has specifically disproved three answers by the Pentagon. He has revealed that SDD testing will not end before mid 2018. Moreover, operational combat testing of the weapons systems will not start before late 2018 or early 2019, and could extend up to 2020.

In addition, Gilmore stated that due to delays in testing of the final version of the F-35’s software and correcting 276 pending deficiencies, planes that were set to be delivered in fiscal 2018 with full combat capability is highly unlikely. He further added that live-fire testing of the jet’s gun system for attacking ground targets and in dogfights against enemy jets will be postponed.

Besides, he claimed that the Navy's version of Lockheed’s F-35 – the F-35C – has inadequate wing strength. Its wingtips are not strong enough to carry the AIM-9X short-range air-to-air missile, a primary weapon, at certain altitudes and airspeeds. In addition, the issue of "excessive F-35 vertical oscillations," or shaking, in catapult launches from aircraft carriers need to be resolved.

Pentagon’s Reaction

According to Joe DellaVedova, spokesman for the Pentagon’s F-35 program office, only a couple of flights have faced stability issues, which have already been placed under review. He said that the program office, along with Lockheed, will continue “to drive toward the completion of the test program, including solutions for the issues cited by Gilmore”.

The program should complete flight-testing of the most capable software by late 2017, he said, although the schedule could be postponed by about another three months.

About the F-35

Lockheed Martin’s F-35 Lightning II is a single-seat, single-engine fifth-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 the 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 10 other countries.

With Lockheed as the primary partner, the F-35 program has been supported by an international team of leading aerospace majors. While Northrop Grumman Corp. NOC contributed its expertise in producing carrier aircraft and low-observable stealth technology to this program, BAE Systems plc’s BAESY short takeoff and vertical landing technologies, and air systems sustainment added to the jet’s combat capabilities. Pratt & Whitney, a unit of United Technologies Corporation UTX, provided the F-35s with the F135 propulsion system, the world's most powerful fighter engine.

Although this engine has led to delays, recently it was announced that engine removal for maintenance – a key measure of engine reliability–  is over 90% and hence not required until 2020.

Our View

Built with the combined expertise of some of the best companies in the aerospace/defense space, F-35 is the world's largest defense program. Going forward, Lockheed Martin aims to increase F-35 deliveries to 53 this year, having supplied approximately 180 since the inception of the program. Management also adopted a cost-saving initiative to lower sustainment costs for F-35 by 10% over the next couple of years. This will result in cost savings of $1 billion over a five-year period.

Price Movement

Lockheed’s share price has improved about 21.7% in the last one year, outperforming the Zacks categorized Aerospace/Defense industry’s gain of 12.2% over the same time frame. This could be because the company continues to witness a steady flow of contracts from the Pentagon and other international customers.

Zacks Rank & Other Key Picks

Lockheed Martin currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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