Will This Stock's "Very Painful" Problem Hurt Your Portfolio?

I thought the Pentagon's go-to defense contractor, Lockheed-Martin (NYSE: LMT  ) , had it all figured out with its pricey F-35 fighter jet. The company had planned to build thousands of the state-of-the-art planes for numerous world governments, bringing a windfall for shareholders. Unfortunately, problems arose once again. Will the Pentagon's frustration with Lockheed shoot down this stock?

Department of Defense diagnosis: frustrated
Mounting costs have become synonymous with Lockheed's high-profile, $396 billion project, but the F-35 has been progressing at a nice clip as the company begins to roll out operational aircraft. Last Friday, however, a Pentagon review of the craft ended with concern and doubts about the fighter's slow pace of progress. According to one participant, the technological challenges facing the aircraft's piloting helmet development turned the meeting "very painful."

Ouch -- that's not what Lockheed shareholders wanted to hear about the company's most recognizable project. To be sure, delays and setbacks frequently hit major aerospace programs; Lockheed even recognizes this in their 2011 annual report. However, if the company can't fix technical glitches surrounding the F-35 -- and if costs continue to soar for the Department of Defense -- then the Pentagon could very well slash orders for the pricey aircraft over its lifetime.

Should you be concerned?
Purchasing reductions hit Lockheed's F-22 fighter program as well, so the company has experience in this arena. However, with significant government budget cuts looming and sparking fears across the defense industry, the hit this time could be significantly worse.

Lockheed's competitors aren't making life any easier for the company. The super-merger in discussion by international aerospace and defense rivals EADS and BAE Systems would knock Lockheed off its pedestal as the largest defense contractor in the world by sales. A decline in future F-35 purchases would only add to that hit, for the fighter program is a valuable cornerstone in Lockheed's increasingly competitive future.

Nonetheless, this aerospace legend still has plenty to offer to your portfolio. Compare Lockheed against its peers, and the company looks very strong.

Company

Return on Equity

Backlog (as of Dec. 11)

Net Margin

Dividend Yield

Lockheed-Martin 102.4% $80.7 billion 6% 4.3%
Raytheon (NYSE: RTN  ) 20.9% $35.3 billion 8% 3.5%
Northrop-Grumman (NYSE: NOC  ) 18.0% $39.5 billion 8% 3.3%

Source: Securities and Exchange Commission Filings and Yahoo! Finance

Lockheed's impressive backlog and dividend give you the best security in the defense field. The company even beats aerospace superpower Boeing (NYSE: BA  ) in that regard, nearly doubling Boeing's defense, space, and security division's $46.4 billion backlog and flying unchallenged among the largest aerospace and defense corporations for pure income investors.

Don't lose sleep over it
You'll need to keep an eye on the F-35's development when considering Lockheed. As the company's most prominent current project, which is capable of bringing in huge future revenues, Defense Department concerns -- and even cuts -- over the fighter could spell trouble. However, it's virtually impossible to beat Lockheed's strengths as a stock and as the Pentagon's cherished contractor. "Very painful" concerns or not, if you want exposure to the defense sector, keep an eye on Lockheed.

This election season in particular could answer a myriad of investor questions over Lockheed and the defense sector, and The Motley Fool has the information you need to prepare. Check Don't leave your portfolio hanging in the political winds; pick up your free copy by clicking here.out The Fool's free special report, "These Stocks Could Skyrocket After the 2012 Presidential Election." 

Fool contributor Dan Carroll holds no positions in the stocks mentioned in this article. The Motley Fool owns shares of Raytheon, 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. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2017494, ~/Articles/ArticleHandler.aspx, 12/22/2014 7:58:26 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement