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Defects Ground Lockheed's F-35

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Lockheed Martin Corporation’s (LMT - Free Report) fleet of 10 F-35 test aircrafts was grounded after a generator failure and oil leak. The incident occurred at the Edwards Air Force Base, California. Consequently, a House Armed Services Committee’s aircraft subcommittee has scheduled a hearing on March 19, 2011.

The $382 billion F-35 program is currently the biggest program in the portfolio of Lockheed Martin. Lockheed Martin is the primary player in the F-35 program along with industry peer Northrop Grumman Corporation (NOC - Free Report) .

In fiscal 2010, sales to the U.S. Government under the F-35 program were 12% of Lockheed Martin’s total sales. The company as of the end of fiscal 2010 had an order backlog of 62 F-35 from the U.S. government. Also, the Israeli Government has signed a letter of offer and acceptance with the U.S. Government for the procurement of F-35 aircraft. Israel is expected to be the first country to receive the F-35 aircraft through the U.S. Government foreign military sales process.

Lockheed Martin is depending heavily on the F-35 program to rejuvenate the fortunes of its Aeronautics segment. F-35 is ideally suited for the current trend of low-intensity conflicts.

Lockheed ended 2010 on a strong note, with both its fourth quarter 2010 earnings per share of $2.30 and fiscal 2010 earnings per share of $7.18 surpassing the corresponding Zacks Consensus estimates. The company issued 2011 earnings per share forecast in the range of $6.70 – $7.00.

The Zacks Consensus Estimates for the first quarter 2011, fiscal year 2011 and fiscal year 2012 currently stand at $1.51 per share, $6.98 per share and $8.53 per share, respectively.

Lockheed Martin is the largest U.S. defense contractor with a platform-centric focus and a steady inflow of follow-on orders with a leveraged presence in the Army, Air Force and Navy. However the ongoing trend of governmental delays in program decisions coupled with program cancellations has affected the fortunes of the defense industry in general and Lockheed Martin in particular.

Lockheed Martin currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock. Our strategy stems from headwinds concerning the company’s largest program - F-35 Joint Strike Fighter facing margin blues. The outcome of the fiscal 2012 congressional budget process is now eagerly awaited.

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