Is This Company a $328 Billion Mistake?
The punches keep coming for Lockheed Martin's (NYS: LMT) F-35. Already plagued by massive budget overruns, continuing delays, and talks led Sen. John McCain to end the program, the suspension of the F-35's ground and air tests couldn't come at a worse time.
This bird's wing has been temporarily clipped
According to the U.S. Defense Department, the F-35 Joint Strike Fighter aircraft suffered a fleet wide ground and flight test operations suspension following the failure of the "integrated power package," a turbo-machine that starts the engine and cools the plane. The department said in a statement that the suspension was a precautionary measure until experts understand the root causes of the failure.
Still, with all the problems facing the F-35, a suspension of any kind is not great news for Lockheed, and a spokesman for Lockheed said in regards to the suspension "We are working very hard with all involved to resolve this issue so we can begin flight operations again, which is everyone's goal."
Budget crunches and added woes
Added to Lockheed's woes are a decreasing defense budget and pressure to reign in defense spending. The F-35 is projected to cost the United States more than $328 billion over the next two decades, and is the U.S.'s costliest arms purchase to date.
With the recent budget that includes $350 in defense cuts, you can bet that defense contractors (and costly projects) are going to come under even more pressure than before. Again, not great news for the F-35 -- it's already faced scrutiny from the Senate Armed Forces Services Committee and narrowly avoided being placed on probation.
Along with budget cuts, Lockheed faces competitors who are lining up to take a bite out of the F-35's profits. Although it's unlikely that the F-35 will be cut from U.S. government use, the company has been promoting its F/A-18E/F Super Hornet as a possible alternative around the globe, and Dassault's Rafale and Russia's MiG-35 are all competing for international sales.
Pull out of the nose dive, Lockheed!
Investors are not the only ones hoping Lockheed will get its act together. If Lockheed loses the F-35 program, or experiences drastic cuts, Lockheed's subcontractors Northrop Grumman (NYS: NOC) , and BAE Systems could face losses on the project as well. Plus, United Technologies (NYS: UTX) , through their Pratt & Whitney subsidiary, are building the engine for the F-35 and are no doubt hoping that the F-35 sees better days soon.
Will it fly?
The F-35 still has a long way to go, and it is facing some real problems. Still, it is highly unlikely that the program will be cut all together, and that at least, is promising news.
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At the time this article was published Fool contributor Katie Spence is looking out the window at big fluffy clouds. She owns shares of Northrop Grumman. She does not own shares of any other company mentioned above. The Motley Fool owns shares of Lockheed Martin and Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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