Please ensure Javascript is enabled for purposes of website accessibility

Raptors and Lightnings and F-16s. Oh, My!

By Rich Smith – Updated Apr 5, 2017 at 8:42PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

How will the Pentagon deal with a cash-strapped economy? How should you?

If you think the growing economic crisis is hitting you hard, consider its effect on the most vulnerable of our corporate citizens: the defense contractors.

A Reuters report yesterday suggests that happy days may not be here again for the defense industry -- at least not unless the economy perks up. The cascade of failing Wall Street banks, and the resultant tightening of lending that's already being felt on Main Street, is expected to hurt tax revenues and crimp defense budgets well into the new administration.

Memo to the next commander in chief
No other aspect of the defense industry has a higher profile right now than the Air Force's new fighter-jet programs, involving the F-22 Raptor and F-35 Lightning II. The Pentagon is looking for some 1,700 F-35s to be built over the next few decades and also wants to more than double the existing fleet of 183 F-22s. But the presidential candidate who inherits the current economic mess will have to do more with less, and that's bad news for defense contractors.

Built by Lockheed Martin (NYSE:LMT) -- with wings by Boeing (NYSE:BA) and engines from United Technologies (NYSE:UTX) -- the F-22 aims to become the dominant air-superiority craft of the new millennium. It will inherit that role from the venerable F-15 Eagle (a Boeing bird). In contrast, the Lockheed/Northrop Grumman (NYSE:NOC) F-35 aims to replace the Lockheed/General Dynamics (NYSE:GD) F-16 and become the world's premier strike fighter. The new birds do have one thing in common, though: They both cost a wing and a leg.

The high cost of progress
And in the end, it's that cost that could determine the programs' futures, their technological improvements over older warbirds notwithstanding. Because however good the new tech may be, these next-gen fighter jets cost orders of magnitude more than the planes they're meant to replace. Here's how a few competing weapons systems break down:

  • F-22 Raptor: $191 million apiece.
  • F-35 Lightning II: $104 million.
  • F-15 Eagle: About $30 million.
  • F-14 Tomcat: Upward of $40 million.
  • F-16 Falcon: Most cost anywhere from $15 million to $30 million, depending on the options. Adding a sunroof, Sirius XM radio, and a spoiler could set you back a bundle.

The Pentagon's shrinking wallet, and how to play it
So here's the question for investors. How do you hedge the risk that a stagnant U.S. economy, declining tax revenues, and a consequently tight defense budget will threaten the cash flows of Lockheed, Boeing, and the like in the coming decade?

I think the Pentagon's been trying to teach its new birds the wrong tricks. In a world preoccupied with the "Global War on Terrorism," it doesn't make sense to be spending $100 million apiece on planes that will drop bombs on people carrying $100 Kalashnikovs.

Sure, we still need high-tech warbirds to counter a rising, heavily militarized, and ever-wealthier China. True, too, Russia's actions in the Caucasus remind us that the Bear is no longer hibernating. The natives are restless, and it seems prudent to keep a few long spears lying around to ward off the Bear when it gets too frisky. So I expect that the government will keep buying F-22s and F-35s -- just maybe not as many as Lockheed investors might like.

Moreover, buying Lockheed on fears of a dampened defense budget seems to me a good hedge. The company is having no trouble selling its supposedly now-obsolete F-16 to foreign buyers, and if the U.S. finds itself temporarily strapped for cash, I wouldn't be surprised to see the Air Force requisitioning a few extra late-model Falcons to bridge the gap between "need" and "want."

Foolish takeaway
Still, I suspect that when it comes to lower-intensity conflicts, the Pentagon will conclude that the more cost-effective means of fighting insurgency reside in the robotic hands of unmanned aerial vehicles. A Predator drone can be had for just a few million dollars, and a more advanced Reaper will set you back less than $10 million. Honeywell's (NYSE:HON) RQ-16A "micro" air vehicle is also inexpensive, and other small, "surgical-strike" UAVs, such as AeroVironment's (NASDAQ:AVAV) planned Switchblade, will likely price below $1 million as well.

We all have to learn to live within our budget at some point; I suspect that the Pentagon's time is rapidly approaching. And if that's true, investors can profit by shopping downmarket from super-duper fighter jets to the humble, but cost-effective, UAV.

Learn more about the economic dynamics betwixt F-16 and F-35 in:

Fool contributor Rich Smith owns shares of AeroVironment and Boeing. AeroVironment is a Motley Fool Rule Breakers recommendation. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.