Lockheed Martin Corporation
(
LMT
) was awarded a $259 million contract for two more F-35 fighter
jets to a batch of jets to be purchased by the U.S. military. The
new requisition increased the size of the order to 32 jets.
The final terms of the fixed-price fifth production contract for
the new radar-evading supersonic fighter jet is still under
negotiation. Earlier, in December 2011, Lockheed and Pentagon
reached an agreement on the contract for 30 fighter jets with an
estimated value of around $4 billion.
The increase in order size for the F-35 program is good news for
Lockheed. Last month, Pentagon stated that the projected cost of
developing and building the F-35 Joint Strike Fighter rose 4.3%
year over year to $395.7 billion in fiscal 2011. Pentagon now
estimates that the total lifetime cost of the new warplane, taking
into account production, operating and maintenance costs, and
inflation, will reach $1.5 trillion over the next 50-plus years.
Facing steep rise in costs, Pentagon is planning to postpone
procurement orders for 179 planes for five years, a move which
would save $15.1 billion through 2017.
The upside in costs was partially due to lower production demand
from both domestic and international customers. Facing lower
orders, Pentagon's acting chief weapons buyer, Frank Kendall,
postponed full-rate production of the fighter by two years to
2019.
At an estimated cost of $382 billion, the F-35 is the biggest
weapons program at Pentagon for the development and purchase of
planes. Any cuts in the F-35 program would affect the fortunes of
not only Lockheed Martin, but also the engine supplier of the
fighter,
United Technologies Corporation
(
UTX
).
Lockheed Martin is the largest U.S. defense contractor with a
platform-centric focus that guarantees a steady inflow of follow-on
orders from a leveraged presence in the Army, Air Force, Navy and
IT programs. We expect the company to benefit from a strong defense
focus on a number of its platform programs, such as the C-130
Hercules & C-5 Galaxy transport aircrafts, F-16 Fighting Falcon
multi-role jet, MH-60 Helicopters, the Advanced Extremely High
Frequency & the Global Positioning Satellite III system
satellites, the Littoral Combat Ship, and the Aegis Weapons
System.
Going forward, we believe Lockheed Martin has significant upside
potential based on the Obama administration's focus on Intelligence
Surveillance Reconnaissance (
ISR
), unmanned systems, force protection, cyber-security, and missile
defense. It already sits on an order backlog of approximately $80.7
billion at the end of the fourth quarter of 2011.
On the flip side, we must remember that a large percentage of
Lockheed Martin's business comes from the US government (82% of
sales in 2011). Budget deficits and political uncertainty make
future defense budgets vulnerable to cutbacks.
In the long term, Pentagon is seeking to trim about $487 billion
in defense spending over 10 years to meet deficit reduction
targets. Also, U.S. economic fundamentals are basically being kept
on a leash as the Euro crisis continues to cast its spell over
financial markets, risking further cutbacks in future defense
budgets.
However, we believe market pessimism is fully accounted for in
the current valuation of the company, which is priced at a discount
to both industry peers and the overall market. In view of these
factors, we currently remain on the sidelines on Lockheed Martin.
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
).
BOEING CO (
BA
): Free Stock Analysis Report
LOCKHEED MARTIN (
LMT
): Free Stock Analysis Report
NORTHROP GRUMMN (
NOC
): Free Stock Analysis Report
UTD TECHS CORP (
UTX
): Free Stock Analysis Report
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