Lockheed Martin's (LMT 1.38%) F-35 Lightning II stealth fighter jet is arguably history's most successful weapons system -- from an investor's point of view.
The United States alone plans to purchase some 2,500 units of the fifth-generation stealth fighter. International purchases could more than double that number over the coming years. Since the first X-35 prototype plane flew in 2000, Lockheed has built nearly 1,000 of these fighters, and eventually the F-35 program could be worth $1 trillion or more to Lockheed.
Even for a defense giant that generated $66 billion in revenue last year, that's a very big deal --- and it just got a little bit bigger.
NYSE: LMT
Key Data Points
Doing the Pentagon math
Granted, not all taxpayers will be happy with this "$1 trillion" number. But perhaps they should be. The bigger the F-35 program gets, the more Lockheed Martin is able to reap economies of scale from producing the plane. Back in 2009, Lockheed stated a goal to drive the price of each individual F-35 produced -- costing more than $100 million each at the time -- down below $80 million. And for some models, at least, it already has.
In January, a Lockheed Martin spokesperson put the base cost of an F-35A conventional takeoff-and-landing (CTOL) fighter jet at roughly $70 million per unit -- not counting the cost of the engine -- and "below $80 million per jet" with the engine, according to an analysis by AirAndSpaceForces magazine. More specialized variants such as the F-35B short takeoff-and-landing (STOVL) fighter for the Marine Corps, and the F-35C carrier variant for the Navy, are estimated to cost just under $80 million and just under $90 million, respectively (without engines).
The falling price of Lockheed's premier warplane has a virtuous effect on sales. Simply put, the cheaper the plane gets, the easier it is to sell planes both in America and abroad. And the more planes Lockheed sells, the more economies of scale let Lockheed lower the price -- so that it can sell even more planes. Lather, rinse, and repeat.
It also helps that the more planes Lockheed sells, and the more often the F-35 appears in U.S. allied air forces, the more other countries want to buy the same plane that their allies fly, so as to better to coordinate their work.
Cheaper planes mean more sales -- and profits
Case in point: Late last month, the U.S. Defense Security Cooperation Agency (DSCA) notified Congress of a planned sale of 24 new F-35A aircraft to a NATO member, the Czech Republic. Including the cost of 25 Pratt & Whitney F135-PW-100 Engines (24 installed, and 1 spare) to fly the planes, a few hundred bombs and missiles to arm them, and other related equipment, DSCA estimated the total cost of this arms sale at $5.6 billion.
Not all of this money will go to Lockheed Martin, of course. The company was named as only one of three principal contractors on the arms deal, with the other two being RTX Corporation (still better known as Raytheon) and Boeing. But at $70 million apiece, the 24 F-35As should still yield a cool $1.7 billion in incremental revenue to Lockheed Martin -- and billions more in revenue from maintaining and upgrading the aircraft over time.
And with this revenue flowing through Lockheed's most profitable division -- Aeronautics, which earned a 10.5% operating profit margin last year according to data from S&P Global Market Intelligence -- this is great news for Lockheed Martin shareholders.
RTX, in contrast, which will be providing the planes' engines, earns only a 5.2% operating margin from its Pratt & Whitney business (although the missiles it will be supplying carry closer to a 10.2% margin). Boeing's defense business, meanwhile -- responsible for some of the bombs that will go on Lockheed's F-35s -- is currently losing money.
What it means for investors
In short, this contract is a bigger win for Lockheed Martin than for its fellow contractors, yielding more revenue for Lockheed -- and at fatter profit margins. Arguably just as important, the addition of the Czech Republic to the growing list of countries operating the F-35 makes the aircraft even more important to Lockheed.
According to data from aerospace publication FlightGlobal, 17 countries currently participate in the F-35 program although not all of these countries have yet received their aircraft. The Czech Republic's addition grows this list to 18 -- and plenty more countries potentially to go. This program still has a lot of room to grow.
