Don't Worry About Lockheed Martin And The F-35

| About: Lockheed Martin (LMT)

Summary

Investors in Lockheed Martin may be concerned the F-35 will drag the company down.

Cost overruns and setback after setback have plagued the project for years and media attention is negative.

Fortunately for investors the program isn't going anywhere and will be a success for Lockheed.

A very comprehensive article recently published on SA by SqueezeMetrics makes a very good case to be concerned about the future of Lockheed Martin (NYSE:LMT) based largely off the F-35 program and the possibility of Democrats taking over Congress and the White House this year. While I can't argue with the short selling, increased leverage or threat to the share buyback they outlined which should be strongly considered by current and potential investors, I feel that their interpretation of the F-35 program and those pesky Democrats leaves much to be desired. By taking a look at how deep the F-35 project really goes and what happens to defense spending under Democrat controlled governments we can sleep a little easier at night with LMT and the other large defense companies.

The media loves to hate the F-35, and for good reason. The program is one problem after another and is easy cannon-fodder for journalists already critical of the defense spending. Despite my stance that investors need not worry about the F-35, I'm critical of the overall program myself. From an investing standpoint though, the military and the US Government has left itself no choice but to press forward. Without even debating the merits of the program it is very clear this train has left the station and will not be returning. The F-35 program is much larger than a plane; it is a cottage industry in itself. Across the country air bases are being updated to accommodate the stealth fighter. Due to its advanced engines and sensors current repairs facilities do not meet the requirements to properly maintain them forcing the military to build depot-level facilities for maintenance, such as in Cherry Point, NC. The military has also invested heavily in the training of pilots for the new plane and for the mechanics and technicians necessary to maintain the craft. Those men and women in the military who previously maintained older aircraft are given the opportunity to laterally move into an F-35 maintenance military occupational specialty which many choosing this route due to the phasing out of the planes they used to maintain. Runways are being updated to accommodate the fifth generation fighter, tool kits are being replaced and updated, security measures aboard installations are being revamped and enhanced, starting to get the picture? With the F-35 we have passed the line of departure and there will be no retreat, we may need to stop and catch our breath at a rally point, but the ultimate mission will be accomplished no matter the cost.

Still there may be issues that the plane just doesn't fly and isn't ready. I guess somebody should go ahead and tell that to the Marines in Yuma, AZ, who were the first to employ 10 operationally back in July of 2015. That number is now up to 17 at Yuma. The Commandant of the Marine Corps at the time, General "Fighting Joe" Dunford had this to say about the squadrons abilities with the F-35 JSF.

"…is capable of conducting close air support, offensive and defensive counter air, air interdiction, assault support escort and armed reconnaissance as part of a Marine air-ground task force, or in support of the joint force. The F-35B's ability to conduct operations from expeditionary airstrips or sea-based carriers provides our nation with its first fifth-generation strike fighter, which will transform the way we fight and win."

It is worth noting that General Dunford is now the Chairman of the Joint Chiefs of Staff and is no stranger to warfare. He outlines the missions that the F-35 JSF is capable of, what he doesn't state is that with that one plane they can effectively replace the F/A 18 Hornet, AV-8B Harrier and the EA-6B Prowler in the Marine Corps. Those planes have served their purposes very well but are becoming increasingly costly to maintain and keep in the air. For the Marines from a long-term cost-benefit analysis standpoint the F-35 is a no brainer, you can essentially have one-third the amount of squadrons and planes yet still accomplish the same missions. I guess the word to relate this to investors is the often-used "synergies." The "synergies" with this program will be accretive to the bottom line. With such an extensive list of capabilities comes an extensive list of possible problems. Every newly fielded piece of gear has issues and the more complex they are at their core the more complex the issues are. Now that the plane is flying in an operational capacity the issues can be fleshed out and dealt with much faster than in a testing only environment. Marines are an ideal group to be the first to deploy the craft, they typically function with much less available to them, are taught to rapidly adapt to the situation and just as rapidly to overcome the situation, they're also not slow to criticize something.

With such a huge price tag for each plane it is only natural to next look at total defense spending. Many investors are nervous about what a Democrat controlled Federal Government could do to the US budget for defense spending. It is natural to think that the party who is known for their anti-war stance would shrink the defense budget, that turns out not to be the case.

Defense spending doesn't really follow party lines; it follows war and conflict. In periods of increased conflict the defense spending naturally increases, after all you need more bullets and band-aids when fighting a war. Elected officials are not excited about lowering defense spending and then being blamed for flag-draped caskets being unloaded off of airplanes because they trimmed a few billion from the budget. They're also not in a rush to cut defense spending that could impact jobs for their constituents. The Congressional Budget Office anticipates flat defense spending regardless of which political party is in power through 2020 referencing the DOD Future Years Defense Program. The popular idea that Democrats spend less on defense than the more hawkish Republicans just is not the case. The argument could be made that Democrats tend to avoid conflict more than their Republican counterparts, but that is an argument for another day and one I simply don't care to enter into.

While there may be concerns regarding LMT in the short-term as outlined by SqueezeMetrics, they should not be the F-35 program or what political party is in office. The F-35 is still going to take off regardless of the spending situation and in years to come the international orders will come in as they wish to streamline and update their current airpower. Every new platform takes years to fully implement, and nothing has been built with the capabilities of the F-35 so the learning curve is steep. Despite the concerns the plane is flying and our allies and enemies will soon witness the benefit of the aircraft. While the cost may be high we clearly see that the defense spending has little to do with which political party holds Congress or the White House and everything to do with conflicts across the globe. As we enter into a period of less ground combat in Iraq and Afghanistan defense spending will naturally taper off from their war-time highs but so will the budgetary needs of the defense contractors. Lockheed Martin still stands as a wonderful long-term investment, as do the other major defense contractors. As always I appreciate you reading and I look forward to the discussion in the comments. I wish you all the best of luck.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.