Lockheed Martin: Will Falling F-35 Orders Push Stock Lower?

Lockheed Martin, the global defence technology company has been facing challenges after its stock came under pressure. According to a Reuters article, President Biden wants to reduce by 18% the number of F-35s the Pentagon will order next year due to savings the administration wants to make to meet Congress spending limits. At the same time, some  analysts remain hopeful and Lockheed Martin has received some support recently. As many have noted, geopolitical tensions remain high and international demand for F-35s is also strong, so defence companies such as Lockheed Martin will continue to attract demand.

Biden sends Lockheed Martin stock lower

Lockheed Martin stock dipped on the 14th of February after reports that President Joe Biden will request fewer F-35 fighter jets for the new fiscal 2025 budget. Lockheed Martin stock closed almost 2% in the red on the news as the change will result

in an about 2% reduction in expected sales revenue for Lockheed. In the meantime, Lockheed was also on the news after Lockheed’s CEO met with Poland President Andrzej Duda to discuss Poland’s defence sector.

In relation to the reports, Biden is supposed to order around 70 F-35s from Lockheed for the fiscal 2025, which is much less than what it was expected. Last year, the Pentagon estimated it would buy 83 of the F-35 fighter jets from Lockheed Martin for $9.8 billion.

The recent reduction in F-35s will account for a roughly 2% decline in the company’s sales guidance in 2024.  The big defence contractor earns about a quarter of its revenue from the jet program, so this change will affect its finances. Nonetheless, international demand for the jets, which cost between $80 million to about $120 million each depending on the type, remains solid.

The cut continues a trend of slowing F-35 orders from the United States. In 2023, Lockheed delivered almost 100 F-35s, a decrease from the 141 delivered in 2022, according to Barron’s.

The chatter about the cuts is not surprising as the president tends to make budget requests around a year ahead of time. And Lockheed has already considered US Department of Defence budgetary limitations in its 2024 guidance. Lawmakers are currently working on a spending bill for the new fiscal year, beginning the 1st of October. Lockheed said in a statement they “look forward to working with the Biden administration and Congress” on the 2025 fiscal year budget in the months ahead.

Budget negotiations between Defence Secretary Lloyd Austin and the White House’s Office of Management and Budget have completed, but the final amount may change before the budget request is revealed on 11 March.

Despite lower F-35 sales, Lockheed experienced a 2% year-over-year (YOY) increase in aeronautics sales in 2023.

How does the news affect traders?

Defence spending is at its highest and credit rating agencies reduced outlooks on US debt last year. Defence companies such as Lockheed Martin are under margin pressure because the government has “been taking advantage of that monopsony power (only one buyer in the market instead of a monopoly where there is only one seller), if you will, over the industry”, Lockheed Martin’s CEO James Taiclet explained on a recent earnings call.

Even if spending increases, Lockheed Martin will find it hard to expand its margin and comments from the company show that they anticipate a moderate increase in profit margins in the coming years.

Lockheed Martin has to deal with F-35 deliveries which have fallen behind in 2023. The near-term outlook may not be as disappointing as some analysts noted, but medium-term issues persist, especially those that concern Lockheed Martin’s margins, its F-35 deliveries, and the long-term future of defence spending.

Business opportunities ahead

Not everything is gloomy for Lockheed though as business opportunities arise in the horizon. Following news reports, Poland’s President Andrzej Duda met with Lockheed CEO Jim Taiclet to discuss about “securing the participation of Poland’s defence sector.”

With the war in Ukraine, Poland has bought billions “worth of weapons and military equipment from South Korea and from the US, including HIMARS systems, Abrams tanks and F-35 fighters.” In 2022, Poland spent 4% of its gross domestic product (GDP) on defence in 2022. That’s double NATO’s recommended 2%. The country’s 2023 budget indicates that only up to about 3.1% of GDP should be allocated for defence. So, depending on what is agreed between Lockheed Martin and Poland, it could mean a robust payout for the defence company.

Lockheed Martin latest news

Homeland Missile Defence Interceptor Acquisition Process

In November 2023, Lockheed Martin completed a Missile Defence Agency (MDA) acquisition milestone for the nation’s modernised long range ballistic missile interceptor. The company completed the first Knowledge Point – known as KP1 –which allows its Next Generation Interceptor (NGI) program to continue development towards the Critical Design Review (CDR). The MDA assessed Lockheed Martin’s development progress including completing design review milestones and demonstrating significant maturation across critical technologies, manufacturing readiness, and utility of the company’s NGI Software Factory. This KP1 success follows the program’s All Up Round Preliminary Design Review, which  was executed by Lockheed Martin in September.

Sarah Reeves, vice president of NGI at Lockheed Martin expressed how proud she was for the rigour demonstrated by Lockheed Martin as they have  reached an exceptional level of maturity regarding the missile defencee program. She added that “With the MDA’s approval, we have turned a corner into our detailed design phase and will keep testing our integrated NGI hardware and software in preparation for production and flight testing.” The company will proceed to its next engineering milestone, CDR. They are currently working on building ground test vehicles and virtually flying the interceptor during system integration trials. NGI is designed to prevent and conquer rogue-nation long range ballistic missile threats to the US homeland. The first Lockheed Martin NGI is anticipated to be delivered as early as the fiscal year 2027.

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