Lockheed Martin’s F-22 Requires Upgrades, Faces Budget Cut Risks

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The U.S. Government Accountability Office (GAO) has stated that the U.S. Air Force will be spending $11.7 billion to upgrade its fleet of F-22 Raptor jets. This is an increase over the previous estimated amount of ~$7 billion, resulting in almost a doubling of the projected cost for making improvements in the F-22 fleet since first estimates were made in 2003. The time period for these improvements has also increased by 7 years to projected ~2017 end. Lockheed Martin (NYSE:LMT), the manufacturer of these jets, has been facing heat on the deficiencies of these aircraft for quite some time now. It had delivered 188 F-22’s to the Air Force for an estimated cost of $67.3 billion. Now the total cost of the jets for Pentagon after these upgrades will increase by almost 18%.

Lockheed Martin is extremely dependent on the U.S. government which accounts for nearly 85% of the firm-wide revenues. This increase in costs will hurt it negatively as the already prevalent cuts in defense spending will be further justified and accentuated by this wasteful expenditure. Lockheed Martin has also run into cost overruns of over $1 billion in its delivery of first 63 aircraft of the F-35 fighter program.

The F-35 program is expected to be one of the biggest revenue generators for Lockheed Martin, calling for the purchase of 365 aircraft by Pentagon through 2017 when flight testing ends for an estimated cost of $69 billion. The worry over these cost overruns can lead the Pentagon to cancel or reduce the F-35 program and future projects, potentially wiping out part of the company’s order backlog.

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See our full analysis for Lockheed Martin

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F-22’s were introduced in the Air Force in 2005, but were  grounded in 2011 as the Air Force discovered a fault with the aircraft’s oxygen system which caused pilots to get dizzy in air. Lockheed Martin is facing litigation from the wife of a pilot who died in this manner from a F-22 plane crash in November 2010. It could take until mid-2014 to upgrade the F-22 fleet according to some reports. The additional costs are expected to be utilized for improving radar capabilities, electronic communications, ground target identification systems, carrying new missiles such as AIM-9X, and structural repairs of the aircraft.

Lockheed Martin is the largest defense contractor in the U.S., competing with companies such as Boeing (NYSE:BA) and Raytheon (NYSE:RTN). We currently have a price estimate of $86 for Lockheed Martin, which is about 6% below the current market price.

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