South Korea's arms procurement agency said Monday, March 25,
that it would buy 40 Lockheed F-35 fighter jets in a deal valued at
$6.8 billion. This confirmation from South Korea for
) F-35 fighter jet program, is in keeping with the increasing
interest from international customers in recent months. The deal is
expected to close in the third quarter of this year, after detailed
negotiations over price and support services. Thereafter, South
Korea will join the U.K., Norway, Netherlands, Italy, Israel,
Turkey, Australia and Japan in the group of countries, apart from
the U.S., that have ordered the F-35.
In our view, this growing international footprint of the F-35
not only helps Lockheed offset the weak defense spending
environment at home, but also saves many millions for the U.S.
government in its procurement of this jet since a larger
international order book lowers the per unit price of the jet.
We currently have
a stock price estimate of $155 for Lockheed
, marginally below its current market price.
See our complete analysis of Lockheed here
South Korea Values Stealth Capabilities Over Budget
In September last year, South Korea surprisingly re-opened its
multi-billion fighter jet deal after turning down Boeing's F-15,
which remained the sole bid conforming to its $7.8 billion budget.
At the time, the country was looking to buy 60 fighter jets in this
budget, but rejected Boeing's F-15 due to its fewer stealth
capabilities. Following this development, we had written that
Lockheed's F-35 is a front runner for the deal, as Korea is now
more focused on acquiring jets with advanced radar-evading
We figure the country's focus on acquiring advanced stealth
capable jets stems from its regional geopolitical calculations. A
stealth capable jet will enable South Korea to hit nuclear
installations inside North Korea - a country with which it has
technically been at war since 1953. At the same time, Japan's order
of 42 F-35s and China's development of an indigenous
fifth-generation fighter jet featuring stealth capabilities also
likely pushed South Korea to acquire an advanced stealth capable
jet. Consequently, the country chose F-35 which has advanced
stealth features, but in doing so it had to trim its targeted order
volume to 40 jets to factor in the F-35′s higher price point. First
F-35 deliveries from Lockheed to South Korea are expected to take
place in 2018.
F-35′s Growing International Reach Helps Lockheed Reduce Its
Dependence On The U.S.
For Lockheed, this growing international client reach of its
F-35 program helps offset pressure from lower defense spending in
the .US. The Budget Controls Act of 2011 requires the U.S.
government to reduce its defense spending by $487 billion over a
ten-year period starting from fiscal 2012.
Lockheed is especially vulnerable to this reduction in US
defense spending as it gets over 80% of its sales from the U.S.
government contracts. So, growing international sales will
enable the company to reduce its dependence on the government and
diversify its risk profile. Lockheed currently targets to generate
20% of its sales from international customers within the next
two-three years. In this context, F-35′s growing international
footprint will enable the company to achieve its target.
International Orders For The F-35 Reduce Cost Burden On The
For the U.S. government, this order from South Korea is
favorable as it will help save many millions for the government,
which is in a tough fiscal situation. The F-35 program being a
large defense program has put a huge cost burden on the U.S.
government. But as international orders for the F-35 grow, the
development costs of this plane, which are largely funded by the
government, get spread over a larger number of planes.
Consequently, the per unit price of the F-35 comes down. In turn, a
lower per unit price will save money for the government as it will
purchase more than 2,400 of these planes from Lockheed.
Currently, the F-35 costs over $100 million a unit. By the end
of the decade, the Pentagon and Lockheed expect its price to fall
to around $85 million a unit, driven by gains from higher
production volumes and growing international orders.
Other countries, notably those from the Middle East including
Saudi Arabia and the UAE have also shown interest in acquiring the
F-35. However, sales of this advanced jet to these countries do not
look feasible in the near future due to Israeli concerns.
Nonetheless, with each additional international order for the F-35,
Lockheed gains as this program will constitute a growing share of
its sales in the coming decade. Last year, the F-35 program
constituted 16% of Lockheed's sales, but that percentage will rise
significantly in the next few years with the planned ramp up in
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