Summary
- Lockheed Martin received a $62B contract that puts the ceiling for further F-16 Block 70/72 orders and services.
- The contract award is important for the F-16 production line.
- Order demonstrates the strength of the F-16 franchise next to the F-35.
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Lockheed Martin (LMT) has been one of the names I have been bullish on for some years. Admittedly, the stock price performance since I wrote my first report on Lockheed Martin has only outperformed the broader market by a few percent, but its total return has been strong and that's realized by strong growth in the dividends. In turn, that ability to grow dividends is driven by a strong product complementary product portfolio and ongoing wins in the field.
Source: RTL Nieuws
In this report, we have a look at one of the most recent wins marking the biggest contract awarded to Lockheed Martin in recent years.
Drilling down on the huge F-16 Order
Figure 1: Contract overview F-16 (Source: AeroAnalysis)
Data from the Defense Contracts Monitor shows that the contract awarded in August has been the biggest contract awarded in recent years. The contract for the F-16 is valued at $62 billion where a couple of things should be taken into account. The first thing that is very important to realize is that the contract award does not mean that Lockheed Martin has been handed a bag of money with $62B in it. Lockheed Martin was awarded a so called “ indefinite-delivery/indefinite-quantity” (IDIQ) contract for a 10-year period. When fully awarded and funded that contract averages around $6.2 billion per year which already puts that $62 billion in context. Additionally, this is an IDIQ contract which is a contract hull used when the customer cannot predetermine, above a specified minimum, the precise quantities of supplies or services that it will require during the contract period. An IDIQ contract award basically sets the ceiling of a program or order and if the need arises governments place delivery orders against that initial IDIQ contract. So, it's no given that over that 10-year timeframe the entire IDIQ will be funded.
The initial delivery order called for the delivery of 90 F-16 fighters valued $4.9B. However, of that $4.9B only $3.9B was obligated at time of award. So that big $62B contract has an annualized value of $6.2B, which further reduces to $4.9B for the initial order and $3.9B in fund obligated at time of award.
