Lockheed Martin (NYSE:LMT) sold the (idea of the buying the) F-35 Lightning II to the U.S. Air Force as a stealth fighter jet costing just $35 million a copy. In fact, says the GAO, Lockheed Martin has been selling the planes for closer to $138 million.
That's a discrepancy no inflation rate can explain away. And yet, there may finally be some good news for Lockheed Martin, for the Pentagon buying its planes -- and for taxpayers footing the bill: The cost of Lockheed Martin's F-35 may finally be coming down.
Earlier this week, in the Pentagon's daily briefing on contracts awarded, Lockheed Martin was awarded a $1.27 billion contract to supply:
- six F-35B Lightning II stealth fighters to the Marine Corps
- four carrier-capable F-35Cs to the Navy
- three Air Force variant F-35As.
That's 13 fighter jets total, for just a little under $1.3 billion -- or just under $100 million per plane. And while that's still more than the $35 million price originally promised, it's actually below the $106 million average price that Lockheed currently estimates as the plane's cost.
...can be deceiving
At least, that's how things look at first glance. There are, however, caveats to keep in mind. Most importantly, when Lockheed says it charges $98 million for the F-35A today, $104 million for the F-35B, and $116 million for the -C -- $106 million on average across all three variants -- the company notes that these prices are all "not including the engine." (Hint: The F-35 is an advanced, fifth-generation warplane -- but it still usually needs an engine to fly).
So how much do those engines add to the cost of an F-35? As luck would have it, the F-35's engine supplier, United Technologies (NYSE:UTX), recently won a contract of its own to supply "F135" engines to the Pentagon. United Technologies priced those engines at about $16.5 million each. Added to the cost of the airframe, that means the average F-35 today costs a bit more than $116 million.
That's still a lot more than $35 million. But at least it's cheaper than the $138 million that, according to GAO, the government was expecting to pay for the airplanes. And that means that, yes, Virginia, the cost of the F-35 stealth fighter jet is coming down.
What it means to investors
Lockheed Martin still has a long way to go to reach its new-and-improved promised price reduction to $85 million per plane by 2018, which it points out is worth only "$75 million in today's dollars." But since we've criticized the F-35 a lot here on the pages of The Motley Fool, we should also give credit where credit is due: Lockheed Martin is making progress at getting the cost of the airplane down. And that will make the F-35 more attractive to future buyers, both here in the U.S., and also abroad.
Does it mean that Lockheed Martin will succeed in selling all of the initially projected 3,100 F-35 fighters around the globe, and ultimately deriving 50% of its revenues from F-35 sales? Maybe yes, maybe no.
One thing's certain, though: Going forward, in contests pitting the fifth-generation F-35 against fourth-generation offerings from Boeing, Eurofighter, Dassault, and Saab, Lockheed Martin will have a much easier time arguing the merits of its own plane at a $116 million price point, than at $138 million. And that's good news for investors in Lockheed Martin stock.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 294 out of more than 75,000 rated members.
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