Lockheed Martin: Growing With Its Aeronautics Segment

| About: Lockheed Martin (LMT)

Lockheed Martin's (NYSE:LMT) aeronautic segment is its main revenue driver, contributing around 30% to total revenue. For the first nine months, this segment has generated revenue of $10.2 billion with a year-over-year decline of 5.4%. Lockheed recently signed a $562 million contract with the U.S. Department of Defense, or DoD. The company will provide nine months of all sustainment activities for its F-22 Raptor stealth fighter jet. As the part of the contract, Lockheed will provide support for engineering, technical data, logistics, and modification and heavy maintenance of the F-22. The contract also includes reliability and maintainability upgrades, which are expected to be completed by Sept. 30, 2014.

Besides the F-22 Raptor, Lockheed's largest Combat Aircraft program is the F-35 Lightning II Joint Strike Fighter, or JSF, which has helped the company become one of the major suppliers to the U.S. military.

Betting on F-35 fighter jets

The JSF contributed 14% to total revenue and 45% to the aeronautic segment in 2012. The success of this program is backed by the continuous strong demand for its F-35 fighter jets from the U.S. DoD. To strengthen the military, the U.S. defense ministry expects to spend $392 billion to purchase a fleet of around 2,443 F-35 jets by the late 2030s. As the part of the deal with the U.S. DoD, the Pentagon last quarter finalized two agreements with Lockheed for supplying 71 F-35 JSFs worth $7.8 billion. Lockheed is also expecting to deliver the final seven of the 36 F-35 JSFs to the U.S. Military by year-end or the beginning of the next year.

Along with the U.S., other countries including Australia, Canada, Denmark, Italy, Israel, Japan, the Netherlands, Norway, South Korea, Turkey, and Britain have each signed a contract with Lockheed for F-35 jets to strengthen their military. Recently, the Norwegian government was authorized by parliament to purchase six F-35 jets, bringing the total order to 16 F-35 jets. Norway's military will pay $654.7 million for the fleet of six F-35 jets, which Lockheed is expected to deliver by 2018. Further, Norway plans to purchase 52 F-35s by 2024, depending on parliament's approval.

With the superior stealth capabilities of F-35 compared to Boeing's (NYSE:BA) F-15 Silent Eagle, Lockheed is expected to receive an order of 40 F-35 JSFs from the South Korean defense ministry in 2014. The first jet is expected to be delivered by 2018. South Korea's defense ministry expects with the F-35A's superior stealth capabilities that it can better respond to North Korea's growing nuclear threat. It has also stated that the South Korean Military requires another 50 to 80 new jets between 2017 and 2028 to replace its retiring F-4 and F-5 fighters.

Apart from the strong U.S. DoD order for F-35 jets, the orders from these other countries are expected to generate strong future growth for Lockheed. Further, to meet such a huge demand for F-35 jets, the company has a five-year plan to increase the production rate of F-35. The production rate for the F-35 will be increased from 29 jets per annum to 42 jets next year, and is expected to increase further to 62 jets in 2016, 76 jets in 2017, and 100 jets by 2018. The company has gradually increased production before and should be able to increase the production rate further. By achieving a production rate of 100 F-35 jets, the company is expected to reduce the price for its F-35A jets from $107 million to around $75 million by 2019. The strong order book and increased production rate will help Lockheed convert its orders to revenue at a higher pace to further strengthen its top-line.

The growing order for Lockheed's fighter jets will, however, also generate opportunities for United Technologies (NYSE:UTX). The company, with its Pratt & Whitney segment, supplies engines for the F-22 and F-35 jets. It has signed a contract worth $1.1 billion with the Pentagon in the fourth quarter of 2013. Under this contract United will manufacture 38 engines for F-35 jets. The higher demand for building F-22 and F-35 fighter jets is expected to generate significant revenue for United.

Apart from these opportunities, United also signed a $231.5 million contract with the U.S. DoD for its F119-PW-100 engines. These F119-PW-100 engines power the F-22 Raptor stealth fighter jet. Under this contract, United Technologies will provide maintenance and repair for F119 jet engines. The contract is expected to be completed by Dec. 31, 2014. Along with its individual orders, United should benefit equally with Lockheed's growing orders for fighter jets and realize growth opportunity as well.


New orders from the U.S. DoD and other countries for Lockheed fighter jets are expected to strengthen Lockheed's top-line. Further, its plan to increase the production rate of F-35s will enable the company timely delivers of its fighter jets. The company expects to report full-year EPS for 2013 of $9.4 to $9.7. Through the end of the third quarter Lockheed has generated EPS of $7.63, and looking at the past performance, where the company generated EPS of around $2 in every quarter since 2009; I expect it will comfortably achieve its 2013 EPS target.

Disclosure: I 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.

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