After Boeing, Trump Attacks Lockheed Martin On Twitter

Last week, president-elect Donald Trump stirred up quite a storm on social media by attacking Boeing’s Air Force One program. This week, Trump has found himself a new target — Lockheed Martin‘s (NYSE: LMT) massive F-35 program. Following his tweet, the company’s share tumbled almost 4%, but recovered some of its losses, ending the day at about 2.5% down. Within a day’s trade, Lockheed’s valuation was trimmed by almost $4 billion. Despite this, management is confident that it will be able to work with the future President to further continue and develop the program.

The F-35 was developed on the design of the X-35, a winning design of the Joint Strike Fighter program at Lockheed Martin. The Pentagon plans to purchase over 2,400 aircraft with an intention to boost the manned tactical airpower of the U.S. Air Force, Navy, and the Marine Corps over the coming decades. Deliveries of the F-35 is expected to be concluded by 2037, with a projected service life out to 2070. It is the company’s belief that the F-35 program could one day account for over 50% of the total revenue at Lockheed in a given year. At present, the aircraft already accounts for about 21% of the defense contractor’s total business.

Why Is The F-35 Program A Point Of Contention?

The program is the most expensive military weapons system in history and, hence, has had its fair share of critics, both inside and outside the government. Since the beginning, critics have argued that the plane has many design flaws that have led to heavy additional costs and  significant delays in the development process. Many have blamed the procurement process in which Lockheed was allowed to design, test, and produce the aircraft all at once, instead of first identifying the defects before starting production. It was further argued that the program’s mammoth sunk costs and political momentum has made the program too big to cancel now. At present, the program has already approached the $400 billion mark. Trump believes that these expenses are unjustified and has vowed to reduce costs as soon as he takes office in January.

Why Should Investors Not Panic Just Yet?

A small analysis will make it easier to see that costs have come down significantly in the recent past.

The Air Force has in the past asked Lockheed Martin to bring the cost per plane down to about $85 million. As recently as May this year, Lockheed Martin managed to bring the cost per plane down to just under $100 million (not including the engines), which is a significant drop. The latest bulk purchase by the Pentagon shows that LMT has made further progress in this respect.

Last month, the Pentagon ordered 90 planes at a price of about $7.2 billion. This brings the cost per plane down to a whopping $80 million. This again is exclusive of engines, however. At present, each engine costs about $16 million. This brings the cost for the complete plane to a grand total of $96 million. Regardless, this a major accomplishment by the company. What it essentially means is that Lockheed has managed to shave off about 20% of the airplane’s cost in just six months. At this rate, Trump’s argument could very soon be invalid.

Previously, analysts believed that defense based companies would begin to get approval from the U.S. government after Trump takes office. However, based on the current scenario, it seems likely that defense manufacturers might need to show increased project efficiencies along with reduced cost structures in order to get new contracts. Given how Lockheed Martin’s progress in the F-35 program, it is likely that the program will go ahead as planned without much of a hitch. After all, it is intended to replace two main-line US fighter aircraft (the F-16 and F-18), as well as more specialized aircraft like the Harrier and A-10.

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