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Is It Time For F-35 To Bid Adieu To The Skies?

July 20, 2014 | About:

Blame it on the engine fire; Lockheed Martin’s (NYSE:LMT) F-35 has been grounded. If this wasn’t all the good news, the F-35 won't fly at Britain's Royal International Air Tattoo, or RIAT, and could miss the Farnborough International Airshow, which starts on July 14. The latest technical failure in F-35’s engine has only added to its already long list of woes. The result of all this is a revised price of the F-35 being tagged at $398.6 billion just for accusation and development. The analysts have therefore started to question whether it’s now time to do F-35 away.

Problems Surrounding The F-35:

The F-35 has always found itself among problems. In addition to its recent engine fire, the F-35 is billions over budget, almost a decade behind schedule, and plagued by technical flaws. In early 2013, the F-35 was grounded due to a crack in the plane's engine. Unfortunately, the F-35's recent engine fire isn't the first glitch to face United Technologies' Pratt & Whitney made F135 engine. In fact, according to defense-aerospace.com, some of the F135's engine problems include: burning hotter than desired, repeated problems with the turbine blades, problems with the redesigned engine including failure to meet specifications, significant test failures, and a major oil leak which happened on June 13, just 10 days before the June 23 engine fire.

The Good News:

The only good news for Lockheed is that despite all of its problems, U.S. lawmakers still seem committed to supporting the F-35. Frank Kendall, Under Secretary of Defense for Acquisition, recently told the House Armed Services Committee that, "There's a growing body of evidence that this may have been an individual situation, not a systemic one. But we don't know that for certain at this point in time."

The bad news, however, is that the problems facing the F-35 continue to crop up, and one has to wonder how long the Pentagon will continue to support this program. For Lockheed, arguably no program is as important as the F-35. In 2013, the F-35 made up 16% of Lockheed's total consolidated net sales, and when Lockheed reported its first-quarter results for 2014, it reported, "Aeronautics' net sales for the first quarter of 2014 increased $200 million, or 6 percent, compared to the same period in 2013. The increase was primarily attributable to higher net sales of about $190 million for F-35 production contracts due to increased volume."

As such, anything that negatively, or positively, impacts the F-35 program is something to watch. Hopefully, whatever caused the latest engine problem will be an easy fix, and Lockheed's F-35 will return to the skies.

To Conclude:

It is safe to say that Lockheed Martin sailed through its last fiscal year with flying colors. Over the period, the defense stock gained 40% in price appreciation. Several issues have surrounded the company and which may have caused some to doubt the company's future revenue stream. These include the heavy reliance on the US Department of Defense; 61% of sales come from the government.

Still, Lockheed Martin remains a good choice for return-seeking investors. The company is set to announce its second quarter results late this month. Before we proceed, let's quickly recall Lockheed Martin's performance during its first quarter. During its last quarter, Lockheed Martin experienced declining volumes which led to a 3% fall in total revenue to $10.7 billion. Cost of sales fell by 9% due to greater risk retirements for the C-130 program at the aeronautics and radar surveillance systems and combat systems programs at MST. We will see these reductions continue in the future. This is because Lockheed Martin is closing and merging certain facilities to reduce its total workforce by 4,000 personnel. I believe the decision was well drafted because given the present facility capacity and future workload projections, enacting cost measures has become necessary to incorporate the changes in U.S. government spending as well as the rapidly changing competitive and economic environment. Recently when the US put sanctions on Russia, the country said it would cut off the sale of its RD-180 rocket engines for use by the American military. All in all, I rate the LMT stock a buy.

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