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Lockheed Martin and Pentagon Sign Agreement on Largest History Supply Contract – The Fool Motley

Lockheed Martin (NYSE: LMT) reached an agreement in principle with the Pentagon on the next batch of F-35 fighter aircraft, reducing the price by 8.8% on the base unit. Even with the reduction, the order, valued at $ 34 billion, would be the largest defense contract ever signed.

The agreement, which comes after months of negotiations, is expected to be finalized in August. It "is the largest market in the history of the department and is the best value for money for our fighter and taxpayer, encourages the industry to continuously improve its performance and achieves the lowest unit prices for the F-35 by plane so far, "was Vice Admiral Mathias Winter. said in a Pentagon statement to reporters.

The order, though planned, is important to Lockheed Martin. The total price reminds shareholders how valuable this program can be when the company finally increases its production. Perhaps more importantly, the rebate will help accelerate Lockheed's quest to achieve a base price below $ 80 million, which should help it strengthen demand in the United States and attract more orders. abroad.

Lower price, larger audience

Lockheed Martin has long stated that he thought he could get a unit price for the F-35A base model of less than $ 80 million as his manufacturing process matured and become more efficient with more orders. important. The price of this lot of F-35A is approximately $ 81.35 million, compared to $ 89.2 million in the last negotiation between the two parties in August 2018.

The agreement officially only covers one year of orders, as the Pentagon will not be able to purchase equipment in the coming years as long as Congress has not approved a budget for the years allotted. But the agreement includes two-year options that provide for the purchase by the United States of about 160 images a year at a base price of less than $ 80 million by the end of the year. agreement.

A landing of F-35.

The Lockheed Martin F-35 program is approaching its destination. Source of the image: Lockheed Martin.

The lower price should also make the F-35 more attractive to potential international customers. The F-35 is currently used by half a dozen countries, but others, including Canada, have been hesitant about the high cost of the aircraft. Lockheed Martin officials hope to sell 1,000 executives to international partners over the life of the aircraft. This extra volume may be the difference between the F-35 being a moderately profitable program or a blockbuster for the company.

The F-35 is currently competing in Switzerland, Finland and Germany. Pentagon officials have also identified allies, including Spain, Poland, Greece, Romania and Singapore, as potential customers. If nothing else was enough, additional orders could help Lockheed Martin offset potential business losses if the US blocked the export of the plane to Turkey.

Attack the F-15

The lower price also sends a message to a local audience. The United States is about to buy thousands of F-35s, but the Pentagon has expressed this year a sudden and unexpected desire to diversify its fleet.

The Air Force has proposed to acquire up to 80 updates and modernizations Boeing (NYSE: BA) F-15 hunters cost a total of nearly $ 8 billion over the next five years. McDonnell Douglas, the future buyer of Boeing, developed the F-15 in the late 1960s, but it has not been bought by the US military for nearly 20 years.

Boeing F-15 parked at the airfield.

Boeing F-15 in the hand. Source of image: Boeing.

The renewed interest in the F-15, according to defense officials, is inspired by the Pentagon's desire to make the most of limited funding. Although the F-15s do not oppose the modern technology deployed by Russia and China, it is more than capable of fighting against insurgent groups or other opponents of inferior technology.

The best way to Lockheed is to make the F-35 as affordable as possible. At $ 80 million per unit, the F-35 and its superior technology are within the scope of the F-15 sticker price. It is probably not enough to put an end to the Pentagon's interest in the F-15, whose exploitation is still much cheaper, at least for now. Lockheed Martin, by reducing its price, makes it more difficult to justify a substantial investment in the F-15.

This plane can soar

The F-35 has had a long and sometimes difficult history. It was not so long ago, investors were wondering if the plane was a failure.

There are still some problems to solve. Defense News reported this week Pentagon officials continue to fight the flaws and problems that, if left unresolved, could put the pilots at risk or prevent the F-35 from working as intended. But Winter, the Vice Admiral who is the Pentagon's F-35 program executive, told the publication that there was no anomaly that would put the program in danger.

It has not been easy, but Lockheed Martin is fully exploiting the potential of the F-35. The company is a better buy because of the diversity of its portfolio, but the F-35 is undoubtedly the most important piece of the puzzle.

Investors can sleep well knowing where the flight plan is heading.

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