Lockheed's Catch-22 Situation

Defense aircraft manufacturer Lockheed Martin (NYSE: LMT  ) looks set to be on the receiving end of the government's recent cost-cutting efforts. Way back in 2001, the company had won orders for F-35 combat aircraft from the U.S. government for an estimated total of $233 billion. Today, the same order is valued at $395.7 billion; that translates to a jaw-dropping 70% hike.

Cue flashback
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.

Compensation crisis
The company is now in a situation similar to that which peer Boeing (NYSE: BA  ) faced some time ago. Owing to delayed deliveries of its Dreamliner aircraft, Boeing was becoming a hot target for filing customer compensation claims. Similarly, Lockheed is now facing a potential threat of supplier compensation worth hundreds of millions of dollars, as orders tend to get thinner over time.

Labor strike
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.

Cutthroat competition
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!

Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Lockheed Martin Corporation Com. 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. Try any of our Foolish newsletter services free for 30 days.


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