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.
On the plus side Aero has no debt, a market cap of $444 million with $134.8 million in cash, and is expecting to see 22% EPS growth in the next year. Be wary of these kind of setbacks, though, as they can be major hurdles for smaller players to get around.
Aero makes more than UAS drones–it also makes charging stations for electric vehicles in the US. Currently it is making a EV charging highway down the West Coast in the US to take advantage of the emerging electric vehicle market. Here is an article from the Motley Fool that talks about Aero’s move into this market.
Final Thoughts
With the wind down of the war in Afghanistan and sequestration some might think that the defense industry has no room left for growth. But you simply have to look at the JSF’s F-35s to see that that isn’t true. Combined with Japan potentially building up its army to combat against the rise of China’s military, the defense sector still has some growth left.
Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends AeroVironment, Inc. (NASDAQ:AVAV). The Motley Fool owns shares of AeroVironment and Lockheed Martin Corporation (NYSE:LMT).
The article An Update on the Defense Industry originally appeared on Fool.com.
Callum is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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