With $65.4B in net sales in 2020 and 74% of those sales coming from the US Government, Lockheed Martin (LMT) is by far the largest Defense contractor and by definition has the most exposure in the ongoing FY22 budget review being conducted by the Pentagon. As the chart below shows, LMT did quite well as part of the Trump defense buildup which really began in 2018. Apart from its massive investment in the F35, the company is actually well diversified among other product lines: rotary wing (CH53K, UH60), Ballistic Missile Defense, space systems and missiles (air to ground, surface to surface both from ships and land vehicles, etc)
Lockheed's #1 product, the F-35, is the perennial target when discussing finding defense budget savings. Despite sniping, the aircraft buys its way back into the budget year after year because of its capability and cost. There is no better aircraft in this mission niche.
- Over the past four years there has been a kabuki dance where the services have requested 74 to 77 aircraft and complain that while they want more, they simply don't have the budget headroom to budget for them. Congress has then dutifully added money, every year, to the services' requests and brought the total to 93 to 96 US jets actually procured.
- FY22 was on track to be more of the same with a total of 77 requested by the Services when Trump's OMB ordered in December that henceforward 85 would be the minimum request. It is that request that is now being examined in the review under the supervision of DSD Kath Hicks with the result expected to be published in early May. Meanwhile Congressman Adam Smith, Chairman of the powerful House Armed Services Committee, who happens to represent Boeing's district in Washington State, has taken to trashing the F35. Not a good enemy for a program to have.
- The aircraft will be fine. The procurement cost is now well under $80M with no fourth generation close to that cost when the cost of the additional paraphernalia needed to make them (F-15, F/A-18) marginally capable is factored in. An hourly sustainment cost of $35,000 per hour, still $10K short of the $25K goal for the F-35 is often quoted. This number is meaningless given few apples to apples comparisons out there. One reasonable comparison is the F-22, the only other fifth gen aircraft in the inventory, which costs $52K per hour to operate. It should be noted that LMT is only responsible for 49% of the operating costs with the government responsible for engine costs, depot maintenance and personnel.
- The bottom line is that despite the numbers being thrown about, the F-35 is doing what it was contracted to do and there is no better alternative. Fourth Gen alternatives lose in almost all analyses of combat against China and Russia. Next Gen Air Dominance (NGAD) is merely power point and is certainly not going to be cheaper than the F35. Although the F-35 will continue to be a punching bag, it will still be bought by the US at a rate of 80+ /year and strong international sales will continue.
Rotary Wing
- There are more than $1B in sales of new UH-60Ms and upgrades in FY21 with similar sales across the FYDP. Expect some curtailment as a way for the Army to pay bills and as part of Biden Administration policy to stop buying legacy in favor of new technology.
- The CH53K is moving into production but its main customer, USMC has gone wobbly on total quantities (from a planned 225 acft to ~ 156 acft at a max rate of ~18 aircraft per year vice planned 24. The change will trigger some reviews and raise the unit price above $87M but it is an essential component to the USMC strategy. It is a one of a kind heavy helo. Israel has declared its intent to procure the 53K and Germany is now considering it.
- Lockheed's Sikorsky has two irons in the Future Vertical Lift fire. Its "Raider" aircraft is competing against Bell's Invictus for the Future Attack and Reconn Acft (FARA) with conventional wisdom sees Sikorsky as winning. It is also partnered with Boeing on the "Defiant" against Bell's Tilt Rotor V-280 for the Future Long Range Assault Aircraft (FLRAA). Downselects are scheduled to occur within a year. Ongoing reviews are likely to delay at least one of these programs.
Missiles and Rockets. This is an emerging priority capability area that will survive any and all budget cuts. LMT generally competes head to head with RTX in this sector. It is also an area where LMT apparently enjoys a technological edge.
- LMT's Long Range Anti Ship Missile (LRASM) program and the Joint Air-Surface Standoff Missile (JASSM) run off the same production line and are worth ~ $1B per year and are critical to any fight with China.
- LMT is the only competitor for the Army's Precision Strike Missile (PrSM) program which will have enough range to take advantage of the abandonment of the treaty limiting ranges on surface to surface missiles. RTX was a competitor but withdrew after successful LMT test flights.
- Hypersonic weapons travel faster than Mach 5 and the US is spending ~$3.2B annually on developing the technology in FY21. Lockheed lis the leader in the development of this technology. (See chart below) DoD is being careful to ensure future competition by funding RTX as well as LMT but LMT currently has a leading position. The bottom line here is that the Biden program reviews are going to add money to develop and field these capabilities and LMT will benefit.
US HYPERSONIC PROGRAMS
