The U.S. Air Force faces a $350 million decision. Its outcome could affect the fate of the world ... and of Lockheed Martin (NYSE:LMT), too.
Discussing defense acquisitions strategy last week at the Stimson Center, a D.C.-based think tank, former U.S. Air Force Chief of Staff Norton Schwartz laid out the dilemma. Right now, the U.S. has a strong force of aircraft capable of carrying nuclear bombs -- 76 B-52s bombers, 61 B-1s, and 20 B-2 "Bat Wing" stealth bombers. The bulk of these planes, though, the B-52s, are starting to show their age, which is why the Air Force wants to develop and field a new Long Range Stealth Bomber, to be dubbed the "B-3," by 2020.
Supplementing this force are "nuclear capable" tactical fighter jets like the F-15E and F-16, both of which the Air Force intends to gradually phase out in favor of Lockheed's new F-35 Joint Strike Fighter.
Problem is, in its present form, the F-35 is not designed to carry the Air Force's arsenal of B61 tactical nuclear bombs. Modifying the F-35's design, and modifying the B61 to fit it, is a project that will take years to accomplish, and cost upwards of $350 million to implement. According to General Schwartz, though, these funds would be better spent developing the next generation of strategic bombers -- the B-3s.
And this, in a nutshell, is the crux of the debate. Given a limited and shrinking defense budget, should the U.S. Air Force allocate precious defense dollars to upgrading the F-35 so that it can duplicate a job that the F-15s and F-16s can do (for now)? Or should it take the $350 million that this upgrade would cost, and invest it into accelerating development of a B-3 Long Range Stealth Bomber, whose own job can currently be performed by the nation's fleet of B-52s, B-1s, and B-2s?
A bird in the hand
I've got an opinion on this debate, and it runs something like this: The Pentagon has a history of starting new weapons projects, sinking billions of dollars into them, and then cancelling them with nothing to show for the effort (see Helicopter, Comanche; see also Stealth bomber, Avenger). Given this track record, I'm not 100% convinced the B-3 will actually get built. The high cost of the program -- $55 billion for 100 planes -- combined with the Pentagon's penchant for incurring cost overruns, could doom the program.
Meanwhile, love it or hate it, Lockheed Martin's F-35 is here today, and most military experts agree that the F-35 will still be flying 60 years from now, which is more than we may be able to say for the Air Force's B-52s, B-1s, and B-2s. My hunch is that the $350 million is better spent getting one plane capable of supporting the third (airborne) leg of America's nuclear triad now. We can worry about topping off the $55 billion B-3 budget if it seems likely that that plane will, in fact, get built.
What it means to you
That said, what matters more to investors is what all of this means to their investments. Fortunately, this angle to the story is pretty easy to read. Right now, there are three companies vying to build the Air Force's B-3 bomber -- Lockheed Martin and Boeing (NYSE:BA) have teamed up on one side of the contest. Northrop Grumman (NYSE:NOC), builder of the B-2, opposes them. Depending on who wins the B-3 contract, any of these three companies could benefit if the Air Force shifts $350 million in spending away from the F-35, and spends it on developing the B-3 instead.
In contrast, only one of these three defense contractors -- Lockheed Martin -- benefits from investing $350 million in upgrading the F-35 today. If the Pentagon then goes on to add a further $350 million in spending to move the B-3 along at a later date, Lockheed Martin benefits twice.
In short, in this battle over funding for the Air Force's "nuclear" options, it's heads, Lockheed Martin wins, and tails, it probably still doesn't lose.