Is Lockheed's F-35 About to Become a Victim of Sequestration?

On Tuesday, a Senate subcommittee approved a measure that would give the Pentagon $594 billion for fiscal 2014 but would put deep spending restrictions on Lockheed Martin's (NYSE: LMT  ) F-35 program. Here's what you need to know. 

By USAF, via Wikimedia Commons. 

The reality of budget cuts
Sequestration may not be making the headlines it once was, but that doesn't mean it's not wreaking havoc on defense spending. In fact, subcommittee Chairman Sen. Dick Durbin, D-Ill, said about the recently passed measure:

We are crafting this support in a highly uncertain and tumultuous budget environment. We cannot continue like this. Across-the-board sequestration cuts are forcing us to play Whac-a-Mole with the defense budget.

And it appears that Lockheed's F-35s are the proverbial mole -- at least for 2015 procurements. The subcommittee approved the $98.4 billion needed to buy 29 F-35 fighters in 2014 but reduces "advanced procurement for fiscal year 2015." In other words, the money to continue ramp-up in production just isn't there. This is especially bad news for Lockheed, as it generates approximately 15% of its revenue from the F-35 program.

It's also bad news for Lockheed's main suppliers on the F-35 program, Northrop Grumman (NYSE: NOC  ) , and United Technologies (NYSE: UTX  ) , which, through their Pratt & Whitney subsidiary, build the engine for the F-35. 

The silver lining
The good news is the proposed measure still has to be reconciled in the House before going to the president for his signature, so there's a chance the cuts won't take place. However, the measure is in line with the Obama administration's request, and the reality of sequestration. If the measure does pass, the good news is that it fully funds the Navy's $100 million request for 10 DDG-51 destroyers. This is great news for General Dynamics (NYSE: GD  ) , which builds the Aegis destroyer through its Bath Iron Works shipbuilding company, and Huntington Ingalls Industries (NYSE: HII  ) , which also builds the destroyer through its Ingalls Shipbuilding company -- the Navy typically buys ships from both builders. 

What to watch
The reality is that without a resolution to across-the-board spending cuts, "essential" programs like the F-35 will feel the squeeze more and more. This will undoubtedly affect company profits and, in turn, could negatively impact stock prices. But, as I've written before, defense giants, like Lockheed, offer a service that is absolutely essential. As such, they'll be able to weather defense spending cuts -- even if it does cause more turbulence than most would prefer.

Sequestration is having an impact on defense companies, but the economy is still rebounding, offering you a lucrative investing opportunity. Further, there is one defense giant for which sequestration's impact is practically nil. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the free full report!


Read/Post Comments (6) | 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 August 03, 2013, at 3:59 PM, ArxFerrum wrote:

    The F-22 and the F-35 are critical components of future air defense. The Raptor has already been killed... if the Lightening II goes down, we will be flying F-15s and F-16s when they are antiques... like we did with planes of the day before WW2.

  • Report this Comment On August 03, 2013, at 8:39 PM, brad1breather wrote:

    regardless of the "cause" it is part of the administration's efforts to weaken America's ability to defend it self to where 6 cubans in a row boat will be able to "invade and conquer" America.

    think about it, if you are able.

  • Report this Comment On August 03, 2013, at 9:03 PM, keboostman wrote:

    F35 is a jobs program. Pull the plug!

  • Report this Comment On August 03, 2013, at 10:30 PM, kanawah wrote:

    The F-35 is over priced and un-necessary. Shut it down, and destroy the fixtures.

  • Report this Comment On August 03, 2013, at 11:34 PM, savage393 wrote:

    The F-35 is a boondoggle. Way over priced, and way past time for cuts. It seems like there are more made for foreign governments, then for us. Well, we don't have the money to pay for this piece of crap. It is just welfare and jobs for the Defense Industrial Complex. This is an area the GOP refuses to make any cuts in, just because they get lots of money from the defense contractors. Quit now while we still have some money left.

  • Report this Comment On August 04, 2013, at 12:39 AM, LotinElite wrote:

    Arx and Bill are right. The F-35 is neither a boondoggle, jobs program, nor unnecessary. The Navy in particular needs a 5th generation fighter to answer the J20, J31, and PAK. Our most effective power projection force cannot contiue to be effective without a modern strikefighter aircraft.

    The are plenty of programs the government spends money on of no utility that could/should be cut instead.

Add your comment.

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: 2577762, ~/Articles/ArticleHandler.aspx, 9/23/2014 8:36:26 PM

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