Lockheed Wins South Korean $6.79B Deal - Analyst Blog

The world's largest standalone defense contractor, Lockheed Martin Corp. LMT, finally clinched a sizeable contract from South Korea for 40 of its F-35 Joint Strike Fighters. The company is set to win more foreign military sales contracts FMS in response to Pentagon budget cuts and delays in buying new jets.

The Republic of Korea has selected the Lockheed Martin F-35 Lightning II aircraft for its F-X fighter acquisition program to beef up its stealth capability in response to North Korea's growing nuclear threat.

As per media reports, the Defense Acquisition Program Administration (DAPA) – Seoul's arms procurement agency – reported an anticipated budget of about 7.34 trillion won or $6.79 billion to procure the F-35s.

The Republic of Korea is the third foreign country to procure the F-35, following Israel and Japan which selected the F-35A in 2010 and 2011, respectively. The Korean F-35 deal is expected to be finalized in the third quarter of 2014, with first delivery scheduled for 2018.

Earlier, South Korea had opted for The Boeing Co.'s BA more economical F-15 Silent Eagle (F-15SE). Lockheed Martin's F-35 and Eurofighter's Typhoon missed the eligibility mark as they were over-budget.

However, the pressure to invest in more advanced fighter planes has compelled the South Korean government to reconsider the case. In Sep 2013, Boeing's F-15 Silent Eagle was finally rejected on grounds of not having enough stealth capabilities.

The F-35 Lightning II Joint Strike Fighter is the 5th Generation Stealth fighter comprising radar evading stealth, supersonic speed and extreme agility with the most powerful and wide-ranging integrated sensor package of any fighter aircraft in history. Apart from the U.S., the plane has also been ordered by Australia, Britain, Israel, Turkey, Italy, Japan, the Netherlands and Norway.

The defense prime's F-35 fighter jet engines are made by U.S. based Pratt & Whitney and U.K.'s BAE Systems as its main international partner. It also includes Northrop Grumman Corp. NOC and United Technologies Corp. UTX as partners on the F-35.

This program, which accounted for 16% of Lockheed's total revenues in 2013, faced years of delays due to technical setbacks and cost overruns. This has led some of its cash-strapped customers, including the governments of U.K. and Canada, to cut or reconsider their orders. The F-35 program is expected to cost around $391.2 billion.

The recent announcement came as good news for Lockheed Martin as the program has repeatedly run up against technical delays and cost flare ups. Recently, the U.S. Government Accountability Office announced that technical problems have led to software testing delays for the F-35.  Again, Italy will also likely cut its plans to buy 90 F-35s.

In response to the rising cost for the F-35, the Pentagon and Lockheed Martin are already looking to lower the cost of building and operating each aircraft by boosting production.

So far, FMS contracts are expected to provide some shield to defense budget cuts and sequestration.

Lockheed Martin currently carries a Zacks Rank #2 (Buy).