Lockheed Scores Japan Order for Fighter Jets, but Will F-35 Program Catch On?
The F-35 program has faced criticism from US officials with regards to development costs and limited international interest. Japan is seen as a much-needed validation for the program.
The F-35 competed with the Boeing (BA) F-18 and Eurofighter Typhoon for the jet fighter contract. Japan ultimately deemed the next generation fighter's stealth capabilities as the winning factor, as the ability to avoid radar detection will be one of the defining characteristics of warfare over the next few decades. The F-35 is also designed to be flexible in that many countries will outfit them to support their needs, which allows each jet to be sold for $114 million.
The F-35 program has faced criticism from US officials with regards to development costs and limited international interest. As lawmakers look to trim hundreds of billions of dollars from the defense budget, Lockheed Martin has struggled to find enough willing partners to amortize work loads and production costs. An investment by a technically advanced country such as Japan is seen as a much-needed validation for the program. "This program badly needed an endorsement like this. But there are still many complications, especially price tag and work demands," said Richard Aboulafia, an anlyst with the Teal Group.
The F-35 decision is unique in that Japan did not have an opportunity to adequately test the aircraft in real-world situations, given its development status. The country also took a gamble in that its fleet of F-4s are rapidly aging and in desperate need of replacements. Any delay in F-35 production could mean problems for Japan's air force. However, Japan clearly valued the next-generation capabilities of the F-35 over the aging F-18 and modern Eurofighter Typhoon. Given the country's willingness to stretch the lifespan of its fighter fleet, the decision could pay dividends a few decades from now.
The decision was informally made well before news of Kim Jong-il's death, which has heightened tensions in the Asia region as there is very little information or guidance on how North Korea's new leader, Kim Jong-un, will handle the transition. It is a reflection of Japan's recent stance on expanding diplomatic relations with the US, as minor tensions had flared in 2009 when the new Democratic Party of Japan had taken power and sought a more equal relationship with its diplomatic partners.
The decision is clearly positive for Lockheed Martin, as the company faces potential issues with future revenue streams. The US decision to pull out of Iraq, as well as a possible end to the Afghanistan war a few years down the road mean that the company will need to find new revenue opportunities.
Traders who believe that Lockheed Martin's F-35 program will continue to generate new orders should consider the following options:
- Purchase shares or call options in Lockheed Martin. If the company can grow revenue from the program, shares could be poised to climb.
- Short shares of Boeing or consider put options. The only fifth generation fighters, the F-22 and F-35, are both produced by Lockheed Martin, and Boeing's failure to adequately replace the aging F-18 could mean the company's jet fighter program is in jeopardy.
- Go long an aerospace and defense ETF. If foreign countries decide to follow Japan's lead and purchase new fighters, the sector could have financial upside for investors.
Traders who believe that countries will cut jet fighter orders will want to consider these trades:
- Go short Lockheed Martin and Boeing, or consider put options. As the US looks to cut defense spending and end its wars in the Middle East, military equipment producers could see their revenues fall.
- Short an aerospace and defense ETF. Even if Lockheed Martin can see gains in the F-35 program, the industry as a whole could suffer if the US continues to cut its defense budget.
Below, find some more great ETF and market content from Benzinga:
Once Hot, Now Not: Some Global Small-Cap ETFs Struggling to Survive
By The ETF Professor
ECB Loans Nearly EUR 0.5 Trillion in First Ever 3-Year Loan Program
By Lear Yann
How Can the Other Half of the World Help You Out?
By Abhi Rao
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter