F-22 Concerns 'Overblown?'

Wall Street analysts Cai von Rumohr and Gautam Khanna are upgrading their Lockheed Martin rating to "outperform," confident that company growth is "still likely under ((the)) new administration" even with possible defense budget cuts, according to an SG Cowen research note issued this morning.

"Higher F-22 cancellation risk an overblown concern," Von Rumohr and Kanna write. Although President-elect Obama's decision to have Defense Secretary Robert Gates to continue in the latter's job "boosts odds that F-22 output (~ 60 of LMT's PS) will end, since he's criticized the fighter for 'next waritis' . . . the current multiyear contract extends thru 2011 (for targeted 183 units). Early termination would be uneconomic; and there's $8 billion in potential updates to bring early F-22 models up to current capability."

The Air Force is in the midst of preparing an official F-22A requirement number and a major Air Combat Command study that could fuel future decisions will be completed next fall, Inside the Air Force reported last week. The Office of the Secretary of Defense directed the service to include $554 million to cover F-22A production shut-down costs in its internal six-year spending plan, according to a summary of Pentagon budget decisions reviewed by ITAF.

Not only that, ITAF learned that OSD's recent decision to fund long-lead item purchases for only four F-22A fifth-generation fighters could result in the cost-per-jet increasing by as much as $35 million:

A 20-plane Raptor buy could end up costing $700 million more than what the Air Force is currently paying for the advanced fighter jets should the incoming Obama administration decide it wants to purchase F-22As in fiscal year 2010, according to information provided by an official close to the program. The best-case scenario shows the Air Force paying $20 million more per plane.

Even if the F-22 line were to shut down, other aeronautical gains are likely through 2011, according to the SG Cowen note. "F-16/C-130 sales are apt to ramp in 2009-10 and hold in 2011 even if the Obama administration has tighter foreign arms sales controls," the analysts write. "Pluses are (1) firm backlogs into 2011, (2) broad order potential (esp. mideast), & (3) further slip of competing ((Airbus)) A400M. F-35 sales are slated to ramp thru 2015."

While the Air Force's "proposed F-35 ((Joint Strike Fighter)) acceleration seems unlikely, DOD is unlikely to both end F-22 in 2011 and slow F-35, especially given its large export potential," von Rumohr and Khanna continue.

The analysts forecast returns on the company's pension fund will improve in 2010, and predict that company earnings per share will grow by 6 percent in 2009 and 2010 "even with slips." With the exception of the F-22 and F-35 product lines, Lockheed "has a broad mix with (1) no Iraq drawdown risk, (2) foreign upside (F-16, C-130J, UAE Patriot/THAAD), (3) #1 services play (22 percent of ((earnings before interest and taxes))) & (4) US. new biz. (LCS, JLTV, CSAR-X, TSAT). Cash redeployment & GOES-R win offer upside."