Japan may consider cancelling its F-35 orders if price over-runs and as delivery delays continue.  The development is a worrying sign for Lockheed Martin (NYSE:LMT), especially since F-35 deals extend to other countries as well. Lockheed Martin is the largest defense contractor in the U.S., competing with companies like Boeing (NYSE:BA) and Raytheon (NYSE:RTN).
With U.S. Defense Cuts Looming, FMS is Essential for Growth
The Pentagon itself has postponed orders of 179 F-35 aircraft for 5 years,  and this puts all the more pressure on Lockheed Martin to keep its foreign military sales (FMS) alive.
The F-35 contributed around 42% of the company’s aeronautics revenues in 2011,  and remains crucial to sustain its cash flow. For now, it seems that Lockheed will urgently need some diplomatic maneuvers to prevent the Japanese from cancelled these orders, as other partner countries like Britain, Canada and Turkey could also reconsider their orders.
We have a revised price estimate of $86 for Lockheed Martin, which is roughly 2% below the current market price.Notes: