Lockheed Martin, a prominent aerospace company, has announced that it will be delivering fewer F-35 fighter jets in 2023 than initially projected. As a result, the company’s free cash flow is expected to decrease. However, despite this setback, there are still positive aspects for investors to consider.
According to Wednesday’s announcement by Lockheed (ticker: LMT), the company now anticipates handing over 97 F-35s to customers in 2023. This figure is lower than the 100 to 125 deliveries that management had previously indicated during a call discussing the second-quarter results. In comparison, Lockheed typically delivers around 150 F-35s per year, with 141 being delivered in 2022.
All of the jets scheduled for delivery in 2023 will be in the Technology Refresh 2 (TR-2) configuration. Meanwhile, an updated version called Technology Refresh 3 (TR-3) is currently undergoing testing. Consequently, the delivery of TR-3 planes will be delayed.
Recently, the Pentagon temporarily ceased accepting F-35 aircraft with TR-3 upgrades until the completion of testing for the TR-3 capability. Morgan Stanley analyst Kristine Liwag highlighted this development in a research report before Lockheed’s update. She estimated that a shortage of approximately 55 aircraft deliveries, compared to Lockheed’s initial target of 147 to 153, could have a negative impact of around $440 million on the company’s free cash flow in 2023.
Given that Lockheed now expects to deliver 97 jets in 2023, Liwag’s call was quite a prediction. The first jets with TR-3 upgrades are now slated to be delivered between April and June 2024.
Lockheed stock dropped about 4.6% in Wednesday’s trading, while the S&P 500 and Dow Jones Industrial Average fell about 0.8% and 0.6%, respectively. Other aerospace supplier stocks fell as well because fewer deliveries mean less need for components. Shares of RTX (RTX) which makes the F-35 engines, fell about 1.6%.
Delays have been in the works for a while,” said Vertical Research Partners analyst Rob Stallard. His estimated hit to 2023 free cash flow is about $350 million.
Wall Street currently projects about $6.2 billion in free cash flow generated in 2023, so the F-35 delay is putting roughly 6% of that at risk. The stock’s decline of nearly 5% more or less matches that, but investors should remember that Lockheed is still going to produce and sell the jets that dropped off the roster this year.
The sales volume and associated free cash flow should only shift from 2023 into 2024 and beyond.