Lockheed Martin Wins $427M Deal To Support F-35 Aircraft

Defense prime Lockheed Martin Corp.’s (NYSE:LMT) Aeronautics business division has clinched a contract regarding F-35 Joint Strike Fighter aircraft. Work related to this deal is scheduled to be over by December 2020.

Details of the Deal

Valued at $427.1 million, the contract was awarded by the Naval Air Systems Command, Patuxent River, MD. Per the terms of the agreement, Lockheed Martin will procure ancillary military equipment and pilot flight equipment for low rate initial production (LRIP) of the 11th Lot of F-35 jets. The services will be offered to the Air Force, Marine Corps, Navy, non-Department of Defense (DoD) participants and foreign military sales (FMS) customers.

Majority of the work will be carried out in Inglewood, CA and White Plains, NY and the rest in St. Petersburg and Orlando, Fl and Fort Worth, TX. The order includes 36% of the work for the Air Force, 20% for the Marine Corps, 12% for the Navy, 19% for non-DoD participants and 13% for FMS customers.

Fiscal 2015 aircraft procurement (Air Force and Navy), fiscal 2016 aircraft procurement (Air Force, Marine Corps and Navy), fiscal 2017 aircraft procurement (Air Force, Marine Corps and Navy), non-DoD participants and FMS funds will be utilized to complete the work.

F-35 Attributes

Lockheed Martin’s F-35 Lightning II is a single-seat, single-engine 5th Generation fighter aircraft. It comes with an advanced stealth feature combined with enhanced fighter speed and agility, fully fused sensor information, network-enabled operations and advanced sustainment.

Currently, 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 10 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. (NYSE:NOC) contributed its expertise in carrier aircraft and low-observable stealth technology to this program. Moreover, BAE Systems (LON:BAES) plc’s (OTC:BAESY) short takeoff and vertical landing experience, and air systems sustainment supported the jet’s combat capabilities. Also, Pratt & Whitney, a unit of United Technologies Corporation (NYSE:UTX) , provided F-35s with the F135 propulsion system, which is the world's most powerful fighter engine.

Our View

We remind investors that despite offering superior air security and stability, the F-35 program has been facing some engine-related technical issues for the last few years. Additionally, it has been repeatedly criticized by President Trump for being an overtly expensive project.

In this context, Lockheed Martin finally inked an $8.5 billion deal with Pentagon this February. Per the agreement, the company will deliver 90 F-35s of the 10th Lot at a historically low rate either forced by Trump’s intervention or to maintain management’s earlier projection of cutting down cost by 6-7%.

Going forward, the company is likely to adopt a cost-saving initiative to lower sustainment costs for F-35 by 10%, over the next few years. This, in turn, will result in cost savings of $1 billion over a five-year period. In fact, we believe the recent contract win will enable Lockheed Martin to take a step toward achieving its goal, so that it could provide more of these combat aircraft at an efficiently reduced rate.

Meanwhile, Lockheed Martin is enjoying steady flow of contracts from the Pentagon since it has reduced its price. Earlier this month, the company won a modification contract, worth 5.6 billion, to offer LRIP of the 11th lot of F-35 Lightening II Joint Strike Fighter. Again, it won a modification contract, worth $258 million, to offer LRIP of the 10th lot of F-35 Lightening II Joint Strike Fighter.

Interestingly, with the U.S. government expecting to spend approximately $400 billion in the upcoming decades to develop and purchase 2,443 F-35 jets, Lockheed Martin is trying its best to effectively reduce the price of this program. Additionally, the government might place larger orders. This, in turn, will boost the company’s profits in the near term.

Price Movement

Shares of Lockheed Martin have rallied 18.8% in the last one year, underperforming the 33.3% rally of the industry it belongs to. This could be because the earlier budget cuts have put pressure on the top line while the present defense budget is more in favor of the sector.

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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