Lockheed Martin Corporation (LMT), AeroVironment, Inc. (AVAV): An Update on the Defense Industry

The next generation of the USAF is the F-35 Lighting II. The F-35 will have 3 different models; the F-35A, which has the conventional take off and land variant; the F-35B, which can perform a short take off and land vertically; and the F-35C, which is made for aircraft carriers and can launch from a short runway. The first of these models, the F-35B, will be rolled out in December 2015. All of these planes are made by .

The US is planning on buying 2,443 F-35’s. The F-35 is a part of the Joint Strike Fighter program that the US, UK, Canada, Norway, Australia, Denmark, Italy, Turkey, and the Netherlands are a part of. Lockheed Martin Corporation (NYSE:LMT) will sell all those planes for a total of $391.2 billion, and the whole program will cost $1.66 trillion over the course of many years. This is the largest defense contract in history, and will be a huge needle mover for those involved.

is going to make the engines for those jets, and both UTX and Lockheed Martin Corporation (NYSE:LMT) will reap huge rewards if they can finally get the project done. In 2019 there is going to be an engine upgrade on the first 2 planes that are rolled out before 2019, when the F-35C is finished.

There have been numerous setbacks that have delayed the rollout of the first F-35 until December 2015, but in March the Government Accountability Office said that the JSF program was slowly moving in the right direction.
UTX and Lockheed will continue to see their stocks move as more updates are provide on the program, but it will be a wild ride until the planes are up in the sky.

UTX pays out a 2.3% dividend yield which is significantly smaller than Lockheed Martin Corporation (NYSE:LMT)’s impressive 4.3%. But if you look at payout ratios Lockheed pays 49% of its profits in dividends while UTX only pays 38%. If UTX was to crank up its payout ratio to Lockheed’s levels, then its dividend would be just shy of 3%. UTX also is expected to grow its EPS by 13.5% over the next few years, which will enable it to raise its dividend yield.

Lockheed Martin Corporation (NYSE:LMT) should start seeing some very strong growth over the next few years with the sale and maintenance of these F-35’s. This will be a boon to its stock price, as its PE ratio (TTM) is 12 as very little growth is priced into this stock.

Drones

Over the weekend the State Department said it was halting its $1 billion drone surveillance program, which will come as a harsh blow to companies like AeroVironment, Inc. (NASDAQ:AVAV). Aero makes 4 different type of UAS (unmanned aircraft systems), which are used for surveillance, are smaller than a human, and fly low to the ground. Aero has had revenue (TTM) of $297 million, so part of that $1 billion would have been big news.