F-35 Joint Strike Fighter Beginning to Power Lockheed’s Earnings

by: Matthew Potter
May 9, 2011

Category: Business Line, Companies, Congress, Contract Additions, Contract Awards, Department of Defense, development program, Earnings, Events, Federal Budget Process, Lockheed Martin, Military Aviation, production program, Raytheon, Services, U.S. Air Force, U.S. Marine Corps, U.S. Navy | RSS 2.0

As the first quarter results for the various large defense contractors role in their have already been some surprises. Raytheon (RTN) failed to meet expectations and suffered a decline in earnings and revenue compared to last year and had to adjust its guidance downwards. Lockheed Martin (LMT) on the other hand reported a good quarter.

Earnings came in at $1.55 a share well above analysts’ predictions of $1.51 and increased 17 cents from last year. This has led the defense giant to raise its guidance twenty-five cents to $6.95 to up to $7.25 in earnings per share on steady sales figure of the $46 billion range.

There are concerns that the defense industry as a whole will begin to see declining revenues and earnings as pressure builds to reduce spending not only in the United States but also in Europe. This means that the contractors will be fighting among themselves for a smaller total amount of money reducing the chance of broad growth in this sector. So far this has translated to results like Raytheon’s where the United Kingdom cancelled a program and the U.S Navy reduced spending on another which affected the company’s performance as a whole. If there are large scale reductions in such spending then more of these effects will be realized.

Lockheed despite the good quarter did have some issues within their different sectors. Two of their four groups, Information Systems and Global Solutions and Space Systems, did see decreases in sales. These were offset by growth at Electronic Systems and most importantly Aeronautics.

Electronics produces radars and missile systems and the U.S.’s continued investment in missile defense including programs like the Army’s PATRIOT PAC-3 which Lockheed make’s the missile for led to some of the growth. The group also made money off of a logistical support contract.

Aeronautics though was the big winner this quarter. Primarily due to sales of the C-130J Hercules transport aircraft which is primarily used by the U.S. Air Force and Marines as well as many international customers such as Canada and recently received orders from several Gulf States. The other aircraft that Lockheed is making that is starting to really affect revenue is the F-35 Lightning II Joint Strike Fighter.

This program is starting to move out of its development cycle and into initial small batch production. The new aircraft will ultimately be made in the thousands as it replaces 1980’s fighters and attack aircraft in the U.S. and many Allies inventory. The JSF has had its struggles and continues to do so as it is late and over budget but the U.S. has slowly been increasing the number being built each year. Air Force budget planning shows that the program will order 10 in 2010, 22 in 2011 and by 2015 up to 70 aircraft.

As the number of aircraft purchased increases the total revenue will also climb dramatically. This means that over the next ten years Lockheed’s revenue will become linked to the program. As long as the JSF remains successful and on track then the company will prosper as well as production continues to increase. Further delays will lead to Lockheed losing revenue and earnings that will have to be made up with other programs and business. Potential declines in defense spending will make that hard and companies will need to hold onto their successful programs. The JSF might just be turning the corner to that status.

Photo from Rob Shenk’s flickr photostream.

Article first published as F-35 Joint Strike Fighter Beginning to Power Lockheed’s Earnings on Technorati.

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