Brian Stutland Right now there are two risks facing this stock: the sequester, and the Pentagon’s grounding of the F-35 Joint Strike Fighter. Despite the looming deadline for the sequester the defense and aerospace sectors are holding strong near 52-week highs. Although Lockheed is off of its lows it is well off its 52-week high, demonstrating relative weakness to its peers. Lockheed has said that they expect sales to be flat as a result of government budget cuts. To make up for this the company is looking to cut costs and increase sales abroad. The other issue facing Lockheed Martin is the grounding of the F-35 Joint Strike Fighter. The fighter is currently 7 years behind schedule and well over budget. The aircraft is still in its testing phase and groundings like this are not uncommon. The reason was a cracked turbine blade and Lockheed says they expect to have a solution by the end of the week. If there is a quick fix then the program will be back up and running in no time, but the problem has potential foreign purchasers becoming more and more skeptical. For instance, Australia is expected to order 100 F-35s, a $13.21 billion deal, but Peter Goon, a consultant at the Air Power thinktank, told Australia’s parliament that “The Joint Strike Fighter is a failed program with no prospect of recovery,” If Lockheed continues to see problems and delays in the F-35 program they become more likely to lose the international customers they will need to grow down the road.
Right now the stock’s downside is somewhat limited by its 5% dividend yield, and the sequester could be factored into the stock’s price already. I would not own the stock here because of the headline risk right now. But buying calls could be low risk, potentially high reward trade if there is good news about the F-35 and the sequester this week.
Joe Tigay 
