The Pentagon Has This Company's Program in Its Crosshairs

With defense cuts continuing to make headlines, defense companies have come under intense pressure to reduce spending or lose contracts. However, there's one company that seems to be facing a little more heat than competitors Boeing (NYSE: BA  ) , L-3 Communications (NYSE: LLL  ) , Textron (NYSE: TXT  ) , Northrop Grumman (NYSE: NOC  ) , and General Dynamics (NYSE: GD  ) .

Lockheed Martin (NYSE: LMT  ) , maker of one of the Pentagon's largest weapons systems, the F-35, is coming under fire from the Senate Armed Services Committee for rising costs associated with the program. Unfortunately for Lockheed's shareholders, this could mean trouble.

Grounded before takeoff
On June 21, the Senate voted on an amendment stating that if the cost of the F-35 program rose more than 10% over the target cost, the program would be placed on probation, and if costs kept rising at the same rate for longer than a year, the program would be cancelled.

The amendment, offered by Sen. John McCain of Arizona, didn't pass -- but it lacked only one vote. That's a little too close for comfort, and it affirms the widespread sentiment that Lockheed is getting a lot of money but failing to solve the problems associated with the F-35 -- that being missed schedules, technical problems, and, of course, skyrocketing costs.  

Ash Carter, head of Pentagon acquisition, asserted that even if the F-35 costs too much, there is no other alternative. That statement seems to have fanned the flames surrounding the F-35, and McCain was reported as replying, "If this weapons system continues to have horrific cost overruns, as it has, then we've got to end it."

So what does this mean for the future of Lockheed's program?

Bring on the competition
Investors must certainly hope that Lockheed is sitting up, taking notice, and doing what it can to mitigate rising costs, but for now, one thing seems certain: The rising cost of the F-35 is not helping Lockheed's reputation. During the SASC's F-35 hearing, McCain questioned Carter about possible alternatives, and Lockheed competitor Boeing has made it clear that it's ready and willing to step in and sell the F-18 as an alternative to the F-35 -- not exactly something Lockheed shareholders want to hear.

A look into the crystal ball

Although a complete cancellation of the F-35 seems a bit unlikely, it is still a possibility -- and it's one that seems to increase in probability along with the increasing price tag. McCain is nothing if not adamant about his opposition to the rising cost of the F-35, and he has vowed to keep pressing the issue when the bill makes it to the Senate floor.

What do you think? Will Lockheed stand up and take notice before it's too late? Sound off in the comments section below, and add Lockheed to your Foolish watchlist.

Fool contributor Katie Spence likes to watch the Air Force's air shows. She owns shares of Northrop Grumman but of no other company mentioned above The Motley Fool owns shares of General Dynamics, Northrop Grumman, Textron, Lockheed Martin, and L-3 Communications. Motley Fool newsletter services have recommended buying shares of L-3 Communications. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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