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

By Katie Spence – Feb 2, 2014 at 10:00AM

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Demand for the F-35 is picking up, but it could still crash and burn if more problems are reported.


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

On Jan. 23, Lockheed Martin (LMT 0.50%) 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 (BA 2.01%) 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.

Katie Spence has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Boeing Stock Quote
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