F-22: The Fighter Fights Back

The giant toddler of the U.S. Defense Industry -- Lockheed Martin Corporation
(LMT - Analyst Report) -- can breathe easy for the moment -- things are looking up for F-22, the LMT fighter plane.

The threat that Secretary Gates will send the F-22 program to an early perdition in 2010 is proving to be just another ruse.  Yesterday, both the U.S. House of Representatives and the Senate Armed Services Committee voted to keep the F-22 on its wings.

While the U.S. House of Representatives reserved a berth for it in the $550.4 billion defense authorization bill for fiscal 2010 it approved, the members of the Senate Armed Services Committee approved their version of the 2010 defense authorization bill, which included $1.7 billion in funding for seven more F-22 fighters.

This does not ensure all roses ahead for LMT, though. An extension of the lifeline of F-22 contradicts the presidential policy of defense cuts, and the threat of a White House veto overhangs.

All in all, a bloodbath is virtually ensured in front of the full Senate. However, with F-22s fortunes tied to 25,000 direct and 9,000 indirect workers spread over more than 40 states, we wonder if the Obama Administration will risk the hostility that an opposition will involve.

The decision was influenced by recent developments in Iran and North Korea, amid continued interest from Japan for F-22 procurement. However, export of the F-22 has been banned under an amendment by the House Appropriations Committee since 1998. This new lease on life will help to keep the F-22 assembly line open till such issues are resolved.

Subsequent to the end of the first quarter, LMT's backlog was $80.8 billion, up 8.0% sequentially and representing approximately 1.8x 2009 of estimated sales. The stock, with a high dividend yield of 2.81, has gone up more than 18% over the past three months, and gives us enough confidence to reiterate our BUY rating on LMT.