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Analyst Blog

The US Air Force has announced that it plans to order 160 more F-35 fighter jets from defense contractor Lockheed Martin Corporation (LMT - Analyst Report) by fiscal year 2017. This transaction constitutes a part of the F-35 program, by far Pentagon's costliest arms program, worth $382 billion. The US Air Force has admitted to buying a total of 1,763 stealthy next-generation jets.

Lockheed Martin’s F-35 is a fifth generation multi-role fighter aircraft. It has supersonic speed, powerful and comprehensive integrated sensor system, strong support equipments, embedded antennas, aligned edges, internal weapons and high fuel capability, which ensure long-term cost savings.

The US Defense Department recently announced a cut down in its $487 billion budget over the next decade, resulting in a slow-down of the procurement plan under the F-35 program and also reduced its planned plane purchase order from 423 to 244 during the fiscal 2013 to 2017.

We believe the declining order for the new F-35’s has prompted Pentagon to take a new defense strategy. As per this new defense strategy, Pentagon will utilize $2.8 billion to test and upgrade its 350 aging F-16 fighters and at the same time will try to replace a small number of aging aircrafts.

Earnings Recap

Lockheed Martin posted fourth quarter 2011 operating earnings of $2.14 per share, 14 cents lower than the year-ago quarterly earnings of $2.28. It was ahead of the Zacks Consensus Estimate of $1.94 by 20 cents. The decline in year-over-year earnings was due to lower government spending on defense.

On the revenue side, Lockheed Martin reported quarterly net sales of $12.2 billion, a year-over-year decrease of $550 million from $12.8 billion. It also fell short of the Zacks Consensus Estimate of $12.3 billion by $91 million. The decline was primarily due to pension expense adjustment; dip in research and development tax credits, and premiums on the early extinguishments of debt and expenses related to facilities consolidation.

Apart from Lockheed Martin’s US operations, the company has strong global footprint in Europe, Australia and Canada. The company has a combined total order of 257 planes from its international partners, which are 13 more than the current US order over the next five years. But, at the same time, we are skeptical whether this number will hold, as most of the countries are also trimming down their defense budget.

Lockheed Martin is the largest stand-alone U.S. defense contractor with a platform-centric focus and a steady inflow of follow-on orders due to its leveraged presence in the Army, Air Force, Navy and IT programs. These are partially offset by the ongoing trend of governmental delays in F-35 Joint Strike Fighter program decisions. The company currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. The company competes with Boeing Company (BA - Analyst Report) and Textron Inc. (TXT - Analyst Report) .

Based in Bethesda, Maryland, Lockheed Martin is a global security company that is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services.

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