Some years ago, when a foreign flying object ventured illegally into Canadian airspace, I read in an article how the Royal Canadian Air Force scrambled two jets to "talk the intruder down". I joked to my Canadian colleague that the pilots probably had to say "please." The Americans would have just blasted him out of the sky, I suggested, before saving myself from all six-foot-four of him by saying that Mounties are hard nuts and hockey rules.
Maybe Canada's Department of National Defense [DND] will be less diplomatic next time such an incursion occurs, especially if it goes ahead with controversial plans to buy F-35 fighter jets from Lockheed Martin (LMT). Lockheed is probably the United States' most famous iron monger for flying weapons. Yes, the company has some issues to grapple with and, yes, the Canada deal has rattled Ottawa, with accusations that the DND commandeered negotiations and never gave Lockheed's competitors a chance.
But it is my opinion that these events will only strengthen Lockheed's resolve, simply because the F-35 program is unmatched anywhere in the world. What even the most skeptical dove cannot deny is that the F-35 could be at the forefront of the aerial weapons race once all its shortcomings are solved. Lockheed has invested too much to see it fail. It is, after all, the only fifth-generation fighter jet that patrols the global skies. It is the iPod among the DVD players. It is Windows to all other operating systems, though, at the moment, the plane is more Vista than W7.
In a world where modern warfare is won in the sky, the DND knew there was only one bidder worth talking to. According to media reports, DND officials met 21 times with Lockheed over six years compared to seven meetings with Boeing (BA), which sells the F-18 Super Hornet, and eight sessions with Eurofighter Typhoon maker BAE Systems (BAESY).
Reports have emerged that Nato, the US government, Japan and other foreign markets are thinking of watering down contracts to be part of the F-35 Joint Strike Fighter Lightning II program. Despite this, the company expects to sell at least 700 planes over the next decade. That's not bad for a supposedly iffy product.
In addition, the program received a major boost last week when the company announced that it had successfully conducted the first ever F-35 night refueling exercise in its history at Edwards Air Force Base, California. On March 22, U.S. Air Force Lt. Col. Peter Vitt rendezvoused with an Air Force KC-135 tanker in the night sky and gratefully accepted fuel through the F-35's boom receptacle. I believe this is a significant stepping stone.
Also, it is not like Lockheed's main competitors are making the most of its problems. Boeing, for example, is struggling to fulfill its obligations on its contract with the Air Force to develop a new KC-46 refueling tanker. The program is already $900 million over the target price of $4.4 billion for the initial development contract and $400 million above the overall price of $4.9 billion, according to Reuters.
Stepping away from the defense sector for a while, Boeing is facing stiff competition from the European Aeronautic Defense And Space Company (EADSY) and its double-decker commercial long-haul airplane, the Airbus 380.
It is not only vibes about the F-35 that gives Lockheed a positive outlook. On Tuesday, Lockheed announced that it had received a $66 million follow-on contract from the Missile Defense Agency to press ahead with developing the successful Terminal High Altitude Area Defense Weapon [THAAD], the world's only technology that enables a country to intercept missiles from inside and outside the Earth's atmosphere. This is the revitalization of the Star Wars defense system from the Reagan era, except now there are no Soviets to complain about it.
Apart from Boeing, Lockheed's other rivals are active but yet to reach F-35 stratosphere. Northrop Grumman (NOC) is emerging as an important player, though it has yet to truly break out and land a multi-million dollar deal. Northrop, along with BAE Systems, another Lockheed competitor, is this week plugging their Joint Light Tactical Vehicle program. Not to be outdone, Lockheed has announced its own optimized JLTV offering at lower costs.
Raytheon (RTN) is one of the world's leading defense companies and is not burdened with the task of selling planes to countries wary of new aerial technology. It is famous for its family of Patriot missiles. The name alone makes it untouchable but, as already mentioned, Lockheed is into missile defense, an industry that is likely to win more customers who are looking at ways of cutting costs.
Lockheed shares traded at about $91 on Tuesday and the company enjoys a decent EPS average of $7.83. Revenue has increased steadily, if not dramatically, over the past four years, while net income has decreased slightly with the company earning $2.66 million at the end of 2011.
Only Boeing beats Lockheed in terms of profits, with $4 million, but the Seattle giant has a tradition of being stingy with its dividend payouts. Lockheed has paid $1 per share for March 2012, the second straight quarter it has done that, more than double that of Boeing, despite having only a quarter of Boeing's $4 million worth of net cash flow.
Lockheed is committed to a program of 50 per cent of available cash going to its shareholders. Certainly, the company is going through some testing times, as are all in the defense industry. However, I believe Lockheed rises above them all in terms of products that are alluring and necessary going forward.
One thing it has that the others don't is the F-35. As Microsoft (MSFT) customers endured Vista until something better came along, the F-35 program, I am confident, will survive, especially with practically zero competition for fifth-generation jets.
