At last report, Lockheed Martin (LMT 0.26%) had delivered 144 of its new F-35 stealth fighter jets to customers around the globe. When earnings come out later this month, it's likely that number will have risen past 150.

But did you know that the F-35 -- despite being billed as "the last manned fighter" the U.S. military will fly -- isn't actually the only fighter jet that Lockheed Martin builds? Did you know, for example, that Lockheed Martin is still building, selling, and earning profit off the F-16 Fighting Falcon?


Air National Guard F-16s stand guard over Korea. Image source: U.S. Air Force.

It's true. Even after churning out well over 4,500 F-16s in 40 years, production of the F-16 is still going. Last year, for example, Lockheed Martin built and sold 17 F-16s -- which was actually more than it sold the year before. Four decades after the aircraft's introduction, the F-16 Fighting Falcon is still a money-maker for Lockheed Martin.

And not just from sales.

Lockheed Martin's big cash cow
Fact is, at a list price of just $34 million or so per unit, Lockheed makes much less money from selling new F-16s these days than from keeping the fleet of 2,242 existing F-16s flying.

Look at the contract announced just last week. On Wednesday, the Defense Security Cooperation Agency notified Congress of a request from South Korea's military to have Lockheed Martin (in cooperation with Northrop Grumman (NOC 0.89%)) supply a package of upgrades to its fleet of "KF-16" Korea-version F-16s. These upgrades include:

  • 150 Modular Mission Computers
  • 150 Active Electronically Scanned Array Radars
  • 150 AN/APX-125 "or equivalent" Advanced Identification Friend or Foe (AIFF) Systems
  • and JDAMS, Bomb Tail Kits, and dummy bombs and missiles for practice and training.

South Korea's laundry list of desired upgrades weighs in at a total contract value of $2.5 billion, according to DSCA.


Order up! One fully loaded Lockheed Martin F-16 fighter jet, with all the trimmings. Image source: U.S. Air Force.

Granted, Congress still has to approve the sale before Lockheed Martin can get its hands on the money. But that's really just a formality. Congress has never rejected a DSCA-notified arms deal. Ever.

As DSCA explained in its notification to Congress, "the ROK Air Force is modernizing its KF-16 fleet to better support its air defense needs." And since helping South Korea defend itself "is vital to the U.S. national interest," it's all but given that this sale, too, will sail right through Congress unopposed. 

What it means to investors
As a nation that counts among its neighbors an increasingly bellicose China and an always fractious North Korea, that's good news for South Korea. It's good news for investors in Lockheed Martin as well.

Although DSCA's notification makes it clear that not all of the $2.5 billion contract will go to Lockheed Martin (Northrop was also named a "principal contractor" on the deal), the nature of the upgrades being requested, and Lockheed Martin's role as the F-16's manufacturer, suggest the bulk of these funds will be going to Lockheed.

According to S&P Capital IQ data, Lockheed Martin earns 11.7% pre-tax operating profit margins on its defense business, implying potential profits of as much as $290 million from this sale. Even after Northrop's cut, that's an amount probably equal to about 5% of the operating profit Lockheed reported last year -- and Lockheed doesn't have to sell a single new plane to earn it.

If you've ever wondered why we say -- over and over again -- that winning market share is so absolutely crucial to a defense contractor's profitability, this $2.5 billion F-16 upgrades deal should make the answer crystal clear.


The sun may be setting on F-16 production -- but profits will see many sunrises to come. Image source: Lockheed Martin.