Slowing F-35 deliveries could trim Lockheed valuation

With the fighter jet eventually expected to account for 20% of revenue, any further production delays will push up the company's aeronautics backlog and reduce earnings

By Trefis Dec 15, 2011 3:46PM
Image: Navy ship (© Corbis)Lockheed Martin (LMT) may consider slowing production of its flagship F-35 fighter jet in the wake of remarks by Vice Admiral David Venlet, the Pentagon's F-35 program director.

Highlighting the structural glitches which have plagued the program, Venlet told AOL Defense that tempering production rates may now be necessary. His remarks draw into question Lockheed's "concurrency strategy," which seeks to maximize unit production before test flights are completed with a view to retrofitting any necessary repairs. If production rates now drop, the change in backlog could have a modest impact on our stock price valuation. Lockheed competes with companies such as Boeing (BA).

See our full analysis for Lockheed Martin here

Concurrency rushes through economies of scale

Lockheed is the Pentagon's No. 1 contractor by sales, with the Department of Defense planning to purchase more than 2,440 F-35s at a cost of $382.5 billion. In order to unleash economies of scale as quickly as possible, Lockheed's strategy has been to ramp production early on in the program and incorporate design changes as needed during testing.

Venlet now describes this approach as a fundamental miscalculation, arguing that the cost burden of retrospectively fixing multiple design flaws on individual units is excessive. He says that while most of the glitches are minor and none of them relate to safety or performance issues, repairs are nonetheless costlier to implement post-assembly. The Pentagon has acted on such concerns twice before, most recently by scaling back its upcoming F-35 production batch from 42 to 30 aircraft.

Slowdown hits backlog

With the F-35 eventually expected to account for 20% of Lockheed's revenue, any further production delays will push up the company's aeronautics backlog and in turn reduce its earnings. Drag the trend-line below to see how a backlog of $1.43 billion by 2018 compared with our current forecast of zero has the effect of trimming about 3% off our Trefis price estimate of $98.

Lockheed US Aeronautics Change in Backlog

While a rising backlog is bad news for investors, any negativity should be placed in the context of the Pentagon's ongoing support for Lockheed. This year the company's aeronautics share of total DOD, NASA and Homeland Security Contracts will reach 2.86%, and its commitment to the F-35 program should see that continue, rising to 3.46% by 2014. Furthermore, 750 units of the F-35 will be sold to 11 partner countries, giving a welcome boost to Lockheed's international aeronautics division.

Lockheed US Aeronautics Share of Total DoD NASA and HS Contracts

This article was submitted as part of our Trefis Contributors program. Join our contributor network and submit a post powered by data and interactive charts.



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