Lockheed Martin Earnings Put F-35 Fighter Issues Back in Focus

The defense industry leader beat earnings estimates, but investors' concerns about the next-generation fighter program still linger

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John Engle
Apr 20, 2021
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On April 20, Lockheed Martin Corp. (

LMT, Financial) reported earnings for the first quarter of 2021. The defense industry titan managed to beat analysts' expectations, delivering net earnings of $1.8 billion or $6.56 per share on net sales of $16.3 billion. Lockheed also revised its forward guidance upward, increasing the midpoint of its full-year revenue forecast to $68 billion.

While there is much for investors and analysts to unpack from Lockheed's latest earnings print, one item in particular stands out as deserving of immediate attention: the ongoing efforts to roll out its next-generation F-35 Joint Strike Fighter.

Cost remains an issue

Cost overruns have dogged the F-35 fighter development for years. While that is hardly an uncommon occurrence for major Pentagon programs, the sheer scale of the overruns has caused concern in government circles, as well as among analysts and industry observes. During the April 20 earnings call, Lockheed CEO James Taiclet admitted as much:

"It's an expensive machine, and it's expensive to maintain, in large part because of the stealth technology, that is more advanced than anywhere else."

Taiclet told analysts that Lockheed is endeavoring to make the F-35 more affordable, with the company currently setting the goal of reducing cost per flight hour from $36,000 to $25,000. Fears that the Air Force may choose to economize by reducing its procurement order have dogged the F-35 program of late. CNBC reported last month that the defense company was facing intensifying pushback over costs related to the F-35 program:

"The Pentagon is under pressure from U.S. lawmakers over how it will pay for the F-35 fighter jet, which is projected to cost $1.7 trillion over the course of its lifetime."

Lockheed's essential program

Lockheed reported that sales of the F-35 had dipped in the first quarter, a rare occurrence for the company's flagship military development program. Unsurprisingly, that served to reinvigorate investors' already significant anxieties. After all, as I have discussed previously, the F-35 is the linchpin of Lockheed's business, and is expected to remain so for the foreseeable future.

Yet schedule delays have clearly become an increasing frustration. On April 14, Bloomberg reported that critical combat simulator tests had been delayed yet again, this time to September 2022, putting the fighter program fully five years behind schedule. However, these delays are largely the result of government scheduling issues, as the National Interest pointed out in a stirring defense of the F-35 program published on March 17:

"Any critic who complains that F-35 isn't in full-rate production without explaining that the problem is caused by a delay in government testing rather than a program deficiency is spreading misinformation. There is no real problem with the program's performance. Each of the three fighter variants built for the Air Force, Navy, and Marine Corps performs the missions for which they were designed several times more effective than the legacy aircraft they will replace."

Thankfully for Lockheed, the Biden administration's recent approval of a $23 billion arms package, which was dominated by F-35 sales, appears to have set the stage for stronger sales during the rest of the year. While it may not be enough to dispel all of the market's worries, it is hard to see it as anything other than a sign of better things to come.

My take

Lockheed Martin's financial success is inextricably tied to the success of the F-35 fighter. Thus, any threat to the program's future no matter how remote is likely to reverberate across the business. Viewed in that context, the market's tepid response to Lockheed's first-quarter earnings beat is perfectly understandable, in my assessment. Even so, I consider Lockheed well positioned for growth over the course of this year and would not be surprised if additional near-term wins for the F-35 to serve as a tailwind to the stock.

Disclosure: No positions.

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John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.