Will the $392 Billion F-35 Make or Break Lockheed Martin?

F-35. Photo: Lockheed Martin via Northrop Grumman.

On Jan. 23, Lockheed Martin (NYSE: LMT  ) reported its fourth-quarter earnings and guidance for 2014. Overall, profits were down, but backlog increased, and 2014 EPS guidance was in line with analysts' expectations. 

However, when it comes to Lockheed's future, arguably one of the most important things to watch is F-35 sales. Here's why.

The future is ...
Lockheed has a number of different business segments, but its most profitable is its Aeronautics division. In 2013, net sales for Aeronautics came to $14.1 billion. The next highest segment was Information Systems and Global Solutions, which had net sales of almost $8.4 billion. Further, for 2013, backlog attributed to Aeronautics came to $28 billion, while the next highest segment was Space Systems, with a backlog of $20 billion for 2013.

Additionally, the aircraft that makes up a large percentage of Lockheed's profit is the F-35. In 2013, Lockheed delivered 13 F-16s, 25 C-130Js, 6 C-5Ms, and 35 F-35s. More importantly, the Pentagon estimates that it'll spend $392 billion for 2,443 F-35s over the next few decades. And, an estimate from the Cost Analysis and Program Evaluation office, or CAPE, puts the price to operate and maintain the F-35s for the next 55 years at $1.1 trillion -- the Pentagon's F-35 office, however, puts the cost at $857 billion.

What to watch
It's pretty clear that the F-35 is incredibly important to Lockheed's bottom line, and future. Investors would thus do well to monitor F-35 setbacks, and sales. The good news is the F-35 has come a long way and is now seeing more progress than problems. Frank Kendall, undersecretary of defense for acquisition, said about the F-35, "Program progress is sufficient for the department to budget for an increase in the production rate in fiscal year 2015." More importantly, Kendall said the F-35's reliability is improving, as are acquisition costs. 

F-15. Photo: Boeing.

In addition, American allies have shown a strong interest in the F-35. Reuters reports that Britain is close to announcing an order for 14 F-35s, and South Korea decided it wanted a fighter with stealth capabilities instead of Boeing's (NYSE: BA  ) F-15. As such, Lockheed's F-35 is favored to win the $7.7 billion contract. This is great news for the F-35, and Lockheed Martin. And what's good for them is likewise good for investors. Still, Lockheed investors will do well to keep close tabs on the F-35.

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Read/Post Comments (4) | Recommend This Article (3)

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 February 02, 2014, at 5:49 PM, TheAncient wrote:

    Ah, Katie Spence, like motor vehicles the cost is not in the vehicle purchase but the spare parts. When one factors in the cost of spares the true price tag closely approaches $1 Trillion. It is strange that you do not see anything odd about having a 60 year contract like this one. At 40 aircraft a year, we'd have to avoid major conflicts for 4-5 years or more to have enough inventory to go against a major opponent. This and the aircraft can only carry 4 missiles(or 2 missiles and 2 small bombs for the Marine version) in it in order to maintain stealth.

  • Report this Comment On February 03, 2014, at 1:42 AM, aquanut87 wrote:

    FYI - TheAncient, it's even worse.

    That F-35B won't be able to even carry 4 missile until block 3F achieves maturity by around 2019 now (if call goes well).

    Initial block 2/3i will carry 2 missiles max into any conflict.

  • Report this Comment On February 03, 2014, at 8:29 AM, dangibson wrote:

    I found it rather in bad taste to use the term ''crash and burn'' when referring to the newest and latest total debacle called the F-35 --

    However the upside is -- everyone of the politicians in Washington -- and the generals -- will be afforded a nice cushy retirement -- moreso than what they already will have -- with just this one order -- and ''one more time'' the American taxpayers take it right up the anal canal -- is this not a great country or what?

  • Report this Comment On February 03, 2014, at 11:42 AM, valuwarrior wrote:

    Small correction--annual sales were down but annual profits, backlog and cash were up, see LMT earning release: "Net sales for 2013 were $45.4 billion compared to $47.2 billion in 2012. Net earnings from continuing operations in 2013 were $3.0 billion, or $9.04 per diluted share, compared to $2.7 billion, or $8.36 per diluted share, during 2012. Cash from operations for 2013 was $4.5 billion after pension contributions of $2.25 billion compared to cash from operations for 2012 of $1.6 billion after pension contributions of $3.6 billion."

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Katie Spence

Katie Spence has been a financial journalist for The Fool since 2011. She specializes in defense companies, “green" technology, autos, and robots. Follow her on Twitter for breaking news in the defense, auto, and robot industry.

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