Lockheed Under Pressure After Harsh Fighter Jet News but We Remain Bullish
Ramping international demand, additional programs and less-than-feared DoD budget cuts are all positives.
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We are seeing shares of Lockheed Martin LMT drop in response to Boeing BA being awarded the contract to design and build the F-47, the U.S.’s next-generation fighter jet that will replace the F-22 Raptor.
We’re disappointed in the news, and to be blunt, a bit surprised given all the issues that have plagued Boeing of late. This makes it a bigger win for Boeing but it’s still a loss for Lockheed, but not an immediate one. We say that because deliveries aren’t expected until sometime in the 2030s, although the U.S. Air Force is expected to spend billions on research through 2029 for the Next Generation Air Dominance (NAGD) manned fighter.
In the meantime, Lockheed continues to make progress with the F-35 and as CFO Jesus Malave reminded folks recently at the JPMorgan Industrials Conference earlier this month, it is ramping up other programs, including multiple missile programs and other aircraft. During that conference presentation, we also got more color on Lockheed’s backlog, which stood at $176 billion exiting 2024. Roughly 30% of that backlog is from the non-U.S. market and includes over 120 aircraft, including F-35, F-16, C-130s, and Black Hawk helicopters. As that matriculates, it is expected to result in Lockheed’s international revenue rising from 24% in 2024 to nearly 30% over the ensuing years. With NATO countries continuing to lift their defense spending, Lockheed remains in a good place.
We’ve also seen Lockheed continue to win new business in recent weeks to the tune of $2.5 billion alone in the last few weeks. And concern over the F-35 program appears to be waning. With that in mind, we’ll borrow this from tomorrow’s Portfolio Signals:
"The partner countries involved in the Lockheed Martin F-35 remain fully committed to the fighter jet, and there’s no sign the United States is changing course on the Joint Strike Fighter program, Dutch Minister of Defence Ruben Brekelmans said.
'It’s in the interest of all of us to make sure that the F-35 program remains operational, that it remains as successful as it is right now, and I don’t see any signs of the United States backtracking.'” Read more here.
All of that said, today’s loss to Boeing is a setback but the company has a strong position in its industry, and there are other opportunities and programs to be won out there. We’re also starting to get more insight into potential Department of Defense budget cuts and it increasingly appears concerns over cuts that would impact Lockheed were overstated.
On Thursday, Defense Secretary Pete Hegseth signed a memo directing the termination of more than $580 million in programs, contracts and grants. The top contract being cut is a software development program for the Defense Civilian Human Resources Management System, which was intended to streamline a significant portion of DOD's legacy human resources program. The Pentagon is also cutting contracts for external consulting services and $360 million in grants. We see this putting a focus on productive programs to strengthen the U.S. military and that should be a positive for Lockheed despite today’s developments.
While we did trim back the Portfolio's LMT exposure earlier this month, as we get more clarity on the U.S. defense budget and international defense spending programs, we’ll revisit our LMT rating. We would not be surprised to see the shares rebound back above our current panic point as calmer heads assess today’s developments against the medium- to longer-term prospects. All things being equal, should we see LMT shares snap back quickly near their 100-day moving average, they could be a source of additional funds for the Portfolio.
At the time of publication, TheStreet Pro Portfolio was long LMT.
