Defense aircraft manufacturer Lockheed Martin
Early in March, I warned you about the "F-35 gap," and the problems seem to have become more compounded for Lockheed Martin since then, with the budget-conscious government slashing allocations for purchase of defense equipment. This is not only proving to be a threat to the company's top-line prospects, but is actually making the F-35 program a lot more expensive than it was expected to be, given the initial bulk production orders Lockheed had received. The problems seem to have taken the shape of a vicious circle, as the resulting price hikes on F-35s make them even less attractive. The resultant demand and supply gap seems to be scaring away investors.
The company is now in a situation similar to that which peer Boeing
Lockheed's troubles don't end there, as the company has to contend with an ongoing labor problem as well. Over the past three years, the company has slashed its labor force by a substantial 18% in order to sustain itself. But the problem doesn't end there. Now Lockheed has to grapple with a nine-week-long union strike that was triggered by the company's attempts to do away with a defined benefit pension plan for its future workers.
Owing to the steep cost increases pertaining to the F-35 program, the government is already looking at Boeing's F-18 as a backup option to cut costs significantly. The fourth-generation fighter doesn't have near the capabilities of the F-35, but it is substantially cheaper.
The Foolish volume game
The red flags are up and waving. Lockheed must bridge the "F-35 gap" as soon as possible. The only way to do this is to attract more buyers in a bid to boost orders and thereby volumes. The orders won by Lockheed from Japan and Norway should be enough to give it a head start. The company is also bidding to build 60 planes for South Korea, which, if approved, will add to its much-needed order volumes. Until then, I would watch this stock from a distance. Add Lockheed Martin to your watchlist to keep a close eye on this stock. Click here -- it's free!