Why Lockheed Martin (LMT) stock is crashing

Lockheed Martin's stock (LMT) fell nearly 6% following reports that the U.S. Air Force intends to significantly cut its F-35 jet orders in the upcoming fiscal year, planning to order 24 jets instead of the previously requested 48, representing a decrease in the proposed budget from previous levels. The Navy and Marine Corps are also facing cuts in their F-35 orders, which is concerning as the F-35 program accounts for approximately 30% of Lockheed Martin's revenue, and further complicated by existing technology upgrade delays and uncertainty around finalizing contracts. This news coincides with broader expectations of defense sector budget cuts under President Trump's administration, with the Pentagon planning to lower military spending by 8% over the next five years.

Analysis

Lockheed Martin (LMT) shares experienced a significant decline, falling nearly 6% to $448.70 and extending weekly losses to over 7%, directly attributable to reports of substantial cuts in F-35 fighter jet orders by the U.S. Air Force for the upcoming fiscal year. Procurement documents indicate the Air Force plans to order only 24 jets, a sharp reduction from the 48 requested last year, with the proposed budget for these aircraft decreasing to $3.5 billion alongside $531 million for advanced material acquisition. Further compounding this, the Navy's F-35 carrier variant orders are also set to decrease to 12 jets from 17, and the Marine Corps will receive two fewer jets. This development is particularly concerning as the F-35 program constitutes approximately 30% of Lockheed Martin's revenue and is already contending with production slowdowns due to delays in a key technology upgrade. Uncertainty is amplified by CFO Evan Scott's statement that a finalized F-35 contract is anticipated in the second half of the year, potentially by June's end, a revision from earlier projections of two major contracts, one in H1 2024 and another by year-end 2025. These specific program cuts align with a broader trend of anticipated defense sector budget reductions, including a Pentagon plan to lower military spending by 8% over the next five years, potentially under a Trump administration, creating a challenging outlook for defense contractors.

Key Decisions for Investors

• Investors should closely monitor the finalization timeline and terms of the F-35 contract, expected in the second half of the year, as this will be a critical indicator for near-term revenue stability.
• Given that the F-35 program represents a substantial portion of Lockheed Martin's revenue, the announced order cuts warrant a re-evaluation of future earnings projections and potential downside risk to the stock.
• Consider the broader implications of potential long-term defense budget cuts, as indicated by the Pentagon's five-year plan, on Lockheed Martin's diversified portfolio and growth prospects beyond the F-35.
• Observe for any further announcements regarding production efficiencies or mitigation strategies from Lockheed Martin to counteract the impact of F-35 order reductions and technology upgrade delays.