If nothing else, President-elect Donald Trump is consistently unpredictable. Just a few days after he called out Boeing Co (NYSE:BA) for what he saw as an overpriced Air Force One jumbo jet, he put the white-hot spotlight on Lockheed Martin Corporation (NYSE:LMT) — via Twitter — for cost-overruns with its F-35 fighter jets.
LMT stock fell a tolerable, but measurable, 1.2% in response, as Trump’s follow-up tweet asked Boeing for its best price on an alternative aircraft — the F-18 “Super Hornet.”
The threat was almost certainly meant to make a point, rather than to initiate a negotiation process with Boeing that would supplant the F-35 contact. In that regard, LMT shareholders don’t have a great deal to worry about right away.
On the other hand, Lockheed is clearly going to be held far more accountable than it has been in years, if not decades.
Trump Rattles the Cage
The exact tweet posted Thursday afternoon:
Based on the tremendous cost and cost overruns of the Lockheed Martin F-35, I have asked Boeing to price-out a comparable F-18 Super Hornet!
That wasn’t the first time LMT owners were a bit rattled by the President-elect’s publicized criticism of the impressive, but ridiculously expensive, fighter jet from Lockheed-Martin. It happened back on December 12th, too. This is the first time, however, that Trump threatened to find another option.
Like it or not, he makes a good point about cost overruns.
As of April this year, the F-35 program’s projected total cost for the contracted 2,457 jets had ballooned to $400 billion, or nearly twice the initially-expected price tag. Lockheed Martin is well behind schedule, too. The defense contractor had planned on delivering 1,013 of the aircraft by the end of the government’s last fiscal year, but had only delivered 179.
As Lockheed builds more, the per-plane price is supposed to go down. Given the gross misjudgment of the project’s price tag so far, however, that’s not an outlook Trump, nor the Department of Defense, can count on.
Irreplaceable
In its defense, when Lockheed won what would become the F-35 contract back in 2001, recreating the prototype plane of this ilk at scale had never been done before; the cost and time frame projections were simply educated guesses.
Granted, they were wildly optimistic guesses from a manufacturer that should have known better. But, it’s better to make the cutting-edge plane do what it’s supposed to do than to skimp on its construction or rush through production. It’s the nature of the plane, in fact, that’s caused the massive delays and overruns.
Calling a spade a spade, there is no other fighter jet like the F-35. And, that’s the assessment from the pilots that fly them.
The plane boasts several aspects that make it a superior combat jet, but two qualities rise to the surface. One is the F-35 is a stealth jet, and second is the on-board computer system is scary-smart (as in “I wonder why the pilot is even in there” smart).
It’s those two nuances that make Trump’s tweet misguided, even if well-intended. Even the most modern version of the F-18 still can’t hold a candle to the F-35. A so-called “Super Hornet” can’t be retrofitted with the F-35’s super-computer, sensors, and stealth technology.
Bottom Line for LMT Stock
None of this is to say that Lockheed Martin won’t bear the brunt of the cost-cutting rampage President-elect Trump appears to be on. Likewise, his Presidency most certainly poses a threat to the profit LMT was planning on enjoying for the foreseeable future.
The Pentagon is now 15 years into the development of the F-35, though. If it were to start over now, the U.S. would almost certainly fall behind in the air superiority race with Russia and China, two contenders the country absolutely can’t afford to lag. The former’s Sukhoi T-50 PAK-A and the latter’s J-20 and J-31 aircraft are not only fifth-generation fighter jets like the F-35, but are also stealth fighters.
In other words, LMT investors don’t have too much to worry about. Trump is mostly just rattling his saber for effect (at least in this instance). Don’t be shocked if the F-35’s price tag peels back a little bit, however, if only as a gesture of goodwill.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
