If there's one thing a company doesn't want to be known for, it's failure. Arguably, next in line to failure would be asininely expensive. Unfortunately for Lockheed Martin (LMT -0.30%), the F-35 has a reputation for both. And at a time when defense spending cuts are hurting domestic spending, overseas spending is of paramount importance. But for the F-35, overseas customers are backing away -- quickly. So what does this mean for Lockheed's stock?
I'm sorry, how much?!
When Lockheed first started the F-35 program, it promised the fighter would cost less to operate than the F-16. Well, almost $400 billion later, a decade overdue, and still not working properly, preliminary estimates for the F-35A put the operating cost as 10% more expensive than the F-16, or $24,000 per flying hour.
Even worse? According to the Pentagon's Cost Analysis and Program Evaluation office, the F-35 will cost $18.2 billion annually, and over its useful life is expected to cost $1.5 trillion. Not surprisingly, overseas purchasers like the Netherlands, Canada, Italy, Australia, and Turkey, have all expressed concern over spiraling costs and delays and have threatened to reconsider purchases. Australia went so far as to say that if there were more delays, it would buy 24 Boeing (BA -0.61%) Super Hornets instead. Furthermore, Denmark has asked for submissions of possible F-35 alternatives like the Super Hornet, and the Eurofighter Typhoon developed by BAE Systems (BAES.Y -1.46%), European Aeronautic Defense and Space, and Finmeccanica.
Competition's revving up
As if the above isn't enough bad news for Lockheed, competition is heating up in the fighter-sphere. Russia's Sukhoi Su-35, while not a fifth-generation plane, has a pretty decent reputation for low fuel consumption and handling capabilities. And it works -- something the F-35 can't yet claim. Plus, the Su-35 just got beefed up with cutting-edge avionics, and now Russia is pushing it as a dependable alternative to troubled F-35.
Moreover, if the F-35 doesn't pick up the pace, it will face even more competition on the horizon as two new fifth-generation planes, the Chinese J-20 and the Russian Sukhoi T-50 PAK FA, are making their way to production. The J-20 is moving at such a fast pace that while it wasn't expected till 2017-2019 according to the People's Liberation Army Air Force, it's now likely that date will move up.
A reputation for failure, but still limping along
Historically, Lockheed's F-35 program has faced setbacks, groundings, massive cost overruns, and not a whole lot of good news. This is likely disconcerting for F-35 subcontractors Northrop Grumman (NOC -0.20%)and United Technologies (RTX -0.28%), which through their Pratt & Whitney subsidiary builds the engine for the F-35.
However, even with sequestration taking effect, the F-35 program hasn't been cut. Plus, there have been signs of life recently.
Cloudy weather ahead?
The F-35 could pull out of its current fog bank, but if things keep going poorly, purchasers could look elsewhere. Furthermore, the F-35 is one of the Pentagon's biggest and most expensive contracts, and the fact that so many issues have plagued it is damning to Lockheed as a company. Consequently, more bad news, or F-35 purchases cancelled, could prove damaging to Lockheed's stock.