Everybody Hates Lockheed

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The Internet is buzzing this morning over the surprising news that Lockheed Martin's (NYSE: LMT  ) F-35 fighter jet is going to cost U.S. taxpayers well in excess of $1 trillion to produce and operate. That would be understandable, except for three things:

It's no surprise. It's not news. And when you get right down to it, $1 trillion really isn't a lot of money.

Begin at the beginning
First things first: This is not news. The Wall Street Journal may have deemed this story important enough to devote a whole page to it (with pictures!), but the fact is that we've been telling you for years that buying and flying 2,500 F-35s would cost $1 trillion and up. Factor in the 1,000 to 2,000 F-35s Lockheed hopes to sell to U.S. allies, and the number gets even bigger. Anyone who's "surprised" by today's WSJ story simply hasn't been paying attention.

Now, I get that the splashy headline in today's WSJ is going to shift the debate. Some folks will respond to it by saying we absolutely must fund General Electric's (NYSE: GE  ) proposed "alternate" engine, for example, as a way to make sure United Technologies (NYSE: UTX  ) doesn't drive up the price any further on the original F-35 engine. Others will argue (as I've suggested is possible), that the best way to control costs on the F-35 … is to not buy it at all. Instead, "plug the gap" in America's fighter jet fleet by purchasing new Lockheed F-16s and Boeing (NYSE: BA  ) F-18s instead.

All of which are valid arguments. But taking any of these actions in a WSJ-headline-induced panic is exactly the wrong move to make, because …

A trillion here, a trillion there … still ain't that much money
Here in the 21st century, "trillion" may be the new "billion" -- but it's still not a lot of money. Not when you consider what we get for it. For one thing, a "trillion dollars" spent over the anticipated 50-year lifetime of the Lockheed F-35 only works out to about $20 billion a year. Add in the flyaway cost of the plane itself, and the tally rises to $27.7 billion -- or less than $100 a year per U.S. citizen.

When you consider that:

  • the F-35 isn't "just another airplane," but the single fighter jet designed to replace multiple fighters already in our air forces …
  • according to Joint Chiefs Chairman Admiral Mike Mullen, this is the last manned fighter jet we'll ever buy …
  • and that the $1.385 trillion figure covers the cost of the planes, their fuel, maintenance, training -- plus the cost of hangars, spare parts, and inflation even …

… I submit to you that we're really "not paying a lot for this muffler." The F-35's annual cost will make up all of 4.1% of our 2012 defense budget -- and that's not a lot of money to buy an air force.

A trillion bucks: It's all relative
In short, this "trillion-dollar price tag" really isn't as big a deal as the Journal makes it out to be -- at least not for taxpayers. In contrast, a trillion dollars is pretty significant to the companies that will be building and maintaining the plane -- subcontractors like GE, UTC, Honeywell (NYSE: HON  ) , Northrop Grumman (NYSE: NOC  ) , and FLIR Systems (Nasdaq: FLIR  ) (these latter three being responsible for the plane's wheels and brakes; its software, fire control radar, and communications; and its infrared radar, respectively.) And of course, to Lockheed itself.

Foolish takeaway
Make no mistake: The F-35 is crucial to the U.S. military's long-term planning. It will make up an important, and growing, portion of the revenue streams of Lockheed's partners. But as I think I've mentioned before, the F-35 is absolutely central to the investment case for Lockheed itself. Revenues from U.S. F-35s alone could secure an average of 60% of Lockheed's annual revenue stream for the past 12 months -- for the next half-century. Factor foreign F-35 sales into the mix, and Lockheed could put perhaps 75% of its revenue stream in the bag from this one product alone.

The F-35 is the single most important reason that last year, I nominated Lockheed to the Fool's list of 10 core stocks for your portfolio. Today's trillion-dollar brouhaha notwithstanding, I remain convinced it deserves a place there still.

Fool contributor Rich Smith holds no position in any company mentioned, but The Motley Fool owns shares of Northrop Grumman and Lockheed Martin. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 27, 2011, at 8:26 PM, tonedeafdave wrote:

    I worked for Lockheed and still hold stock. The range of its activities and skills is enormous. But, from a cursory reading of thhe article, surely it is rather vulnerable to the loss of this single large contract.? To this investor, specifically interested in its stock price, that seems to me to be a major risk.

  • Report this Comment On May 28, 2011, at 12:53 AM, TMFDitty wrote:

    Granted. *If* canceling the F-35 was an option. But remember that we've already retired the F117 and canceled the F-22. The F-35 is the only stealth fighter jet left in the lineup.

    What are the chances the Pentagon will cancel it, too, and rely exclusively on an F-16 / F-18 air force? Knowing that China already has a stealth fighter prototype undergoing test flights?

    Not gonna happen.


  • Report this Comment On May 28, 2011, at 1:12 PM, naksuthin wrote:

    The F-35 estimated to cost the US taxpayer $1 Trillion!!!!!!

    This is an OUTRAGE. We are trying to cut medicare to grandma, student loans, milk for babies and we are going to spend 1 Trillion dollars

    ($1,000,000,000,000) for a jet fighter?????

    Someone wake me up!

    The money they are spending on just this fighter alone would solve the budget crises of every single state in the Union and leave money to pay off the national debt.

    This is clearly a sign that Pentagon supporters haven't gotten the message that the US is trying to trim it's budget and pay off it's debt....not ring up more spending.

    1 Trillion!!!!

    1 Trillion!!!!

    1 Trillion!!!!

    Get real. That's about all the money that every single country on earth put together spends on military spending in a full Year!!!

    Just for you information, we've been fighting two wars in Iraq and Afghanistan for the last ten years and it was the "cheap" unmanned predator drones ($25 million ) that made the big difference.

    Those F35 are just going to be flown around at airshows and then retired when they come up with the next fancy expensive jet fighter

    If you are deep in debt and you ask your family to cut back on food, turn off the heat in winter, flush the toilet just once a day, buy shoes from Goodwill store...... and then you go out and borrow money to buy a Maserati because "I need transportation to work" what does that say about you as a husband and a parent??

  • Report this Comment On May 28, 2011, at 8:42 PM, mracz425 wrote:

    @ naksuthin

    Great Response!

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