Lockheed Martin (NYSE:LMT), the largest defense contractor in the US, came under the radar recently when one of its fighter plane engines in the F-35 program caught fire. The company had to undergo restrictions regarding its F-35 jets implemented the US Defense Department, causing a holdup in what is known to be the most expensive project in the world. The F-35A has a value of $98 million, F-35B $104 million and F-35C is valued at $116 million.
The company is a huge contractor for US defense as it provides a range of fighter planes, missiles, satellites, shields and is a major player in the international market as far as the military spending by various countries is concerned. The restrictions caused the nonappearance of these fighter jets at two of the famous Airshows, Farnborough Air Show and the Royal International Air Tattoo preventing them from showcasing their capabilities.
Lockheed's standing in the market
Current valuation of the company is highly dependent on the sales it makes with the international investors. Lockheed's revenue generation from the U.S government in the past few years has accounted for 85%. But due to low spending from the Defense Department, the company focused on its international sales and is predicted to generate around 20% of its total revenue from it in the near future. Since Lockheed's backlog constitutes 25% of international orders, the target would not be a hard one to achieve.
Various countries of the world are spending on military equipment which provides a great opportunity for Lockheed's to advance its growth through fulfillment of international orders. Increasing demand can be seen in Asia and the Middle Eastern countries. Even though there's huge competition lined up for Lockheed along with restraints from the government which are not faced by other competitors regarding defense contracts and transfer of technology but the company has an impressive collection of military equipment that would still keep it strong rival in the race for international sales. Finmeccania, BAE Systems (OTCPK:BAESF), and Airbus (OTCPK:EADSF) are the major contenders against Lockheed.
Lockheed's prospects as restrictions are eased
Lockheed earns about 17% of overall revenues through the F-35 program. In the years to come, Lockheed's revenues would have a greater share occupied by the F-35 program, as the company is planning for the jet's production to be accelerated. Currently the program is in the preliminary stages, which is why it has a low rate of production, but scaling up this project is in the works. US government contracts help the program generate most of its sales, which is why the government's recent low spending on the project has made the company vulnerable. Higher cost savings can be generated if the production is set to full scale which would definitely put Lockheed in the front line as F-35 program would help improve the company's margins as well. Presently the company's valuation heavily depends on the project as it drives the growth of the company which can be assessed from the quarter results announced in June where Lockheed's profits lifted despite the low spending from US defense department.
Since F-35 is costing the department a fortune, Lockheed is entered into an agreement with the defense department to check the affordability of the F-35 program. As the decision to cut the prices down to $80 million or less are circulating, it is expected that international sales would increase as many countries showed their reservations on the price earlier; this re-planning would turn out to benefit of the company. With 3,000 fighter jets in the making, Lockheed would now find meeting its initial target a much easier task. The US itself is expected to obtain 2,400 pieces, while the rest would be up for grabs by countries like Turkey, the UK, Israel, South Korea, Australia, Norway, Japan, the Netherlands, and Italy, which have already placed their orders with Lockheed for the F-35's procurement.
On 22nd August 2014, Lockheed Martin stock was observed to have traded at $175.10 with a dividend yield of 3.04%. The prospects are already looking hopeful, as the company's standing is better than that of a few months ago. Lockheed did receive an ease in restrictions earlier as well for speed testing and maneuverability, but thorough investigation - which could go on for years into the F-35 project - is needed, as it is paramount for the company to step up its game as a frontrunner in the US national security.
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