Lockheed Martin - Share Prices Continue to Surge as Taxpayers Foot the Bill for the F-35 JSF "Disaster"

"Shares of Lockheed Martin are breaking out to the upside." 

This headline could have basically been copied and pasted to financial articles for the past 15+ years; and for good reason too as the price of LMT stock has appreciated 600% since the beginning of 2001 (not to mention the 3% annual dividend distribution).  That would be an amazing run for an innovative 21st century technology start-up company... but Lockheed is a large-cap defense contractor whose stock has been publicly traded since 1977. 

One can't help but notice that this run directly coincides with the company's $1.5 trillion contract with the U.S. Department of Defense to develop the, then next generation, F-35 Joint Strike Fighter.

http://www.cnbc.com/2014/07/31/how-dods-15-trillion-f-35-broke-the-air-force.html

The Joint Strike Fighter program was originally intended to be an economical, one size fits all, utility aircraft for multiple branches of military service.  Variants of the core design were intended to replace multiple aircraft that currently carry out mission specific objectives like amphibious operations (currently performed by the McDonnell Douglas AV-8B Harrier; unit cost $28 million) and close air support (currently performed by the Fairchild Republic A-10 Thunderbolt; unit cost $12 million).  However, the F-35 has yet to assume any of these roles and a seeming majority of voices in the defense industry are skeptical that it ever will.

In October of 2001, Lockheed Martin beat out rival, Boeing, to supply the military with the aircraft many said would be the last ever manned military plane.  Expected delivery, 2007 with a unit cost of $81 million.

As of December of 2015, Lockheed had delivered just over 150 F-35s with an estimated unit cost of $120 million.


IF IT'S BROKE, DON'T FIX IT

While plenty has been said about the mounting problems and costs of the F-35 JSF, somehow the rise of Lockheed's stock has been comparatively inconspicuous.  If we look at a historical performance chart of Lockheed (LMT) and two of its main subcontractors on the F-35 program, Northrop Grumman (NOC) and Raytheon (RTN), versus LMT's main competitor, Boeing (BA), and the S&P, the visual out-performance is stunning.

It appears that traders remain very bullish on the abilities of Lockheed and its subcontractors to make money going forward.  LMT, NOC and, to a lesser extent, RTN are all currently in breakout technical patterns in the face of an increasingly unstable market.

LMT:

NOC:

RTN:

Given this type of stock performance, it would seem that Lockheed doesn't have a lot of incentive to solve the F-35 problem.  It's not just the F-35 that has driven Lockheed's stock either; the defense contractor also made the F-22 Raptor which had significant problems and cost overruns of its own before eventually being prematurely discontinued by the DoD.

According to Lockheed's CEO, Marillyn Hewson, however, the company's stock price somehow isn't related to the massive cost overruns of its projects.  In an almost defiant stance, she said that "we expect to get a return for (our) performance."  And quite the return she has gotten already... since taking over as CEO in 2013, Hewson has brought home roughly $87 million in executive compensation.


BEAUTIFUL DISASTER

At it's inception, the JSF was thought to be the last manned military aircraft that would be put into service.  Fast forward 15 years and the F-35 is still a long way from being fully operational; meanwhile, significantly cheaper unmanned drones already have long service records and are evolving to assume the roles that the F-35 was supposed to fulfill.

Many people have called the F-35 a disaster... but for Lockheed, it's been a beautiful disaster.