Lockheed Martin shares sank as much as 7% after a report that the Pentagon is halving F-35 requests for the Air Force

Lockheed Martin's stock price fell as much as 7% following reports that the Pentagon is requesting significantly fewer F-35 fighter jets for the Air Force in its latest budget proposal, dropping from 48 to 24 aircraft; the shares recovered to close 4.2% lower. This potential reduction, though not final and subject to Congressional approval, signals a possible shift in defense spending priorities under the Trump administration, with increased scrutiny on the F-35's cost and relevance amid the rise of drone warfare, but Lockheed Martin plans to enhance the F-35 using technology from its failed F-47 bid.

Analysis

Lockheed Martin's (LMT) shares experienced significant volatility, initially declining 7% before recovering to close 4.2% lower at $456, reflecting a moderate market impact from reports of a substantial proposed reduction in US F-35 fighter jet procurement. The Pentagon's unconfirmed request, as reported by Bloomberg, suggests a halving of the Air Force's F-35 order from a projected 48 to 24 aircraft for the upcoming fiscal year, alongside proposed reductions for the Navy from 17 to 12 aircraft and for the Marine Corps from 13 to 11. This development is particularly impactful as the US is the F-35's largest customer, with long-term plans for 2,456 aircraft. While the request is not final and Congress, which has previously increased F-35 funding above Pentagon requests, will deliberate on the FY2025 defense budget, the magnitude of the proposed cut signals a potential shift in Pentagon spending priorities. This shift may be influenced by the Trump administration's directive for an 8% budget reallocation from existing programs, from which the F-35 was not explicitly protected, and growing criticism over the program's $1.7 trillion cost and perceived relevance in an era of advancing drone warfare. In response, Lockheed Martin emphasized the F-35's proven capabilities and affordability, and CEO Jim Taiclet outlined plans to enhance the F-35 platform with technology developed for its unsuccessful F-47 bid, aiming to offer next-generation capabilities at a reduced cost. The overall sentiment surrounding this news for LMT is moderately negative, with a tone of uncertainty regarding final procurement numbers and long-term program stability.

Key Decisions for Investors

• Investors should closely monitor the Congressional FY2025 defense budget deliberations, as the final approved F-35 procurement numbers will be a key determinant for Lockheed Martin's near-term revenue and production outlook.
• It is crucial to assess Lockheed Martin's progress and technical feasibility in enhancing the F-35 platform as a cost-effective alternative, given the increased scrutiny on program expenditures and the competitive landscape highlighted by the F-47 bid loss.
• Consider the potential for broader shifts in US defense spending priorities, particularly towards drone technology and away from high-cost legacy programs, which could impact other contractors beyond Lockheed Martin and inform diversification strategies.
• Factor in heightened political risk related to potential changes in defense procurement strategies under various administrations, which could significantly impact long-term contracts for major defense contractors like Lockheed Martin.