Wednesday, 26 April 2017

F-35 will take millions more, months longer than expected

Government watchdog: F-35 will take millions more, months longer than expected

APR 25, 2017, 6:57 AM

The Government Accountability Office released a report on Monday warning the Department of Defence against funding further software updates for the already $US400 billion F-35 program until the current software becomes operational.

The F-35 is already operational with the Air Force and Marine Corps, but it runs a limited version of its software, called the 3i block, which only provides 89% of the code required for full warfighting potency.

Meanwhile, as the US keeps buying the jets, Lockheed Martin, the F-35’s primary manufacturer, is scrambling to provide 100% of the code with their planned 3F update.

At a conference earlier this year, Lockheed Martin told Business Insider they hoped to have the updated software loaded into the factory and ready to go on new jets by the end of 2017, but the GAO found that claim unlikely.

“Program officials optimistically estimate that the program will need an additional five months to complete developmental testing,” the statement reads. But “according to best practices” and “credible estimates,” the GAO pegs that number at around 12 months.

And while F-35 program officials admit the delay will cost an additional $US532 million, GAO cites $US1.7 billion in cost overruns with “approximately $US1.3 billion of which will be needed in fiscal year 2018.”

One reason the F-35 costs ramp up so quickly, according to the report, is a high level of concurrency between the F-35’s development, testing, and procurement. Essentially, all three of those processes take place simultaneously, unlike past defence projects, so a delay in development immediately hurts testing, which then hurts procurement.

Lockheed Martin officials have told Business Insider that the best way to save money on the program would be a large investment allowing them to buy bigger blocks of F-35s at once, thereby leveraging economies of scale.

But the GAO recommends the opposite — essentially saying the F-35 should not put out request for proposals on the even further out block 4 of F-35 software until they can complete the 3F, base their estimates on historical program data, and resubmit a revised budget to Congress.

As many experts and US service members have told Business Insider, the military awaits the full combat potential of the F-35 for national security reasons as adversarial nations like Russia and China field advanced aircraft and threats of their own.

The F-35’s block 4 of software promises to open up the full range of combat potential inherent in the F-35, including expanding the jet’s arsenal to include nuclear weapons.

President Donald Trump has already weighed in several times on the F-35, with Lockheed Martin’s CEO Marillyn Hewson telling Business Insider in March that his involvement in a previous F-35 buy helped save hundreds of millions of dollars.

Original post:

Lockheed Martin: Shrinking Yields

Apr.25.17 | About: Lockheed Martin (LMT)


Lockheed Martin trades down following Q117 results.

The recent stock gains sit squarely on multiple expansion and not exactly value creation by the defense company.

The shrinking yields highlight how investors are getting less value for the stock above $270.
Lockheed Martin (NYSE:LMT) is down nearly $8 after a mixed Q117 earnings report
Despite very bullish news for the defense sector over the last few months, my investment thesis hasn't changed much.

The stock is trading back down below $270 as the rally to new all-time highs stalls. Is now really the time to chase Lockheed Martin higher?

The headline numbers suggest that the defense company missed EPS estimates by a wide $0.18 margin. The reality is that a couple of one-time charges cost Lockheed Martin roughly $0.39 so the real issue is that revenues missed targets by $170 million.

Very noteworthy is that the company raised operating cash flows for the year to $6.0 billion, up from $5.7 billion. The lowered EPS guidance was due entirely to the one-time charges that Lockheed Martin doesn't adjust out of the reported numbers.

So while the headlines are problematic with the actual reality, the numbers further highlight the extremely stretched valuation. The company raised 2017 revenue guidance that still sits only slightly above 6% growth for the year while the stock trades at an incredible 22x EPS guidance for the year.

The reality is that a lot of the stock gains have come from expanded P/E multiples over the last year. If Lockheed Martin traded at the same forward P/E multiple as the start of 2016, the stock would trade closer to $210, not $270.

Related post:

F-35 Lightning II: Details