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Lockheed Martin Wins U.S. Navy Deal to Support F-35 Jet

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Lockheed Martin Corp.’s (LMT - Free Report) Aeronautics business division secured a modification contract worth $37.7 million in relation to F-35 fighter jet. Work related to this deal will be carried out in Fort Worth, TX and Samlesbury, UK.

Per the terms, the company will exercise an option to conduct software conversions for structure and systems datasets. These conversions will be done to support the production of the 10th lot of Lockheed Martin’s F-35 joint strike fighter.

The contract was awarded by the Naval Air Systems Command Patuxent River, MD. Fiscal 2016 aircraft procurement (Navy and Marine Corps); fiscal 2017 (Air Force and Navy); and non-Department of Defense (DoD) participants funds will be utilized to complete the task by June 2020.

A Brief Note on F-35

Lockheed Martin’s F-35 Lightning II is a 5th Generation, single-seat, single-engine fighter jet. It offers a combination of advanced stealth as well as fighter speed and agility, fully fused sensor information, network-enabled operations and advanced sustainment.

With Lockheed Martin being the primary partner, the F-35 program has been supported by an international team of leading aerospace majors like Northrop Grumman Corp. (NOC - Free Report) , BAE Systems plc (BAESY - Free Report) and Pratt & Whitney — an unit of United Technologies .

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 regard, Lockheed Martin inked an $8.5-billion deal with Pentagon in February 2017. Per the agreement, the company will deliver 90 F-35s of the 10th Lot at a historically low rate owing to Trump's intervention or to maintain management's earlier projection of cutting down cost by 6-7%.

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 the company to take a step toward achieving its goal and allow it to provide more of these combat aircraft at an efficiently reduced rate.

Meanwhile, Lockheed Martin is enjoying steady flow of contracts from the Pentagon since reduction of its F-35 price. In July 2017, Lockheed Martin won a modification contract, worth $5.6 billion, to offer low-rate initial production of the 11th lot of F-35, while in August 2017 it won a contract worth $258 million, to offer LRIP of the 10th lot of F-35.

Furthermore, with the U.S. government expecting to spend approximately $400 billion in the upcoming decades for the development and purchase of 2,443 F-35 jets, Lockheed Martin is trying its best to effectively reduce the price of this program. Also, the government is likely to place larger orders, thus boosting the company’s profits in the near term.

Price Movement

Shares of Lockheed Martin have moved up 19.1% over a year, underperforming the 30.3% 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.

 

 

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