Credit: Shutterstock photoThe Republic of Korea has finally agreed to purchase Lockheed Martin Corp. 's ( LMT ) 40 F-35 Lightning II Joint Strike Fighter (JSF) aircraft for its F-X fighter acquisition program to beef up its stealth capability in response to North Korea's growing nuclear threat.
The deal marks the country's biggest-ever weapons purchase under which it will pay about 7.3 trillion won ($7.1 billion) for the F-35 jets. Deliveries are slated to start in 2018 and will run through 2025.
South Korea initially agreed to purchase F-35A jets in Mar 2014 and has since then been negotiating with the U.S. prime contractor Lockheed Martin over price, technology transfer and other related matters. Though South Korea did not provide any detail about the timing of the closure of the deal it was earlier expected to close this quarter.
The Republic of Korea is the third foreign country to procure the F-35 fighter jet, following Israel and Japan, which selected the F-35A in 2010 and 2011, respectively.
Earlier, South Korea had opted for The Boeing Co.'s ( BA ) more economical F-15 Silent Eagle (F-15SE). Lockheed Martin's F-35 and Eurofighter's Typhoon had missed the eligibility mark as they were over-budget.
However, mounting pressure to invest in more advanced fighter planes compelled the South Korean government to reconsider the case. In Sep 2013, Boeing's 60 F-15 Silent Eagle jets for $7.7 billion were finally rejected on grounds of not having enough stealth capabilities.
The F-35 Lightning II JSF is the 5th Generation stealth fighter combining radar evading stealth, supersonic speed and extreme agility with the most powerful and wide-ranging integrated sensor package of any fighter aircraft in history. Apart from the U.S., the plane has also been ordered by Australia, Britain, Israel, Turkey, Italy, Japan, the Netherlands and Norway.
Lockheed Martin however ran up against F-35 glitches lately as the Air Force, Navy and Marine Corps grounded all F-35 flights on Jul 3. The order was issued following an emergency at Eglin Air Force Base in Florida on Jun 23, when a fire in the rear of one plane compelled the pilot to terminate a takeoff. Lockheed Martin has subsequently resumed F-35 flights with a fix for its engine expected soon.
Also, as per media reports, the company is expected to close a $4 billion deal for 43 F-35 jets with the U.S. Department of Defense (DoD). This should bring the cost of the eighth batch of these planes down 2% to 4%.
Meanwhile, Pratt & Whitney − the engine manufacturer of Lockheed Martin's F-35 JSF and a unit of United Technologies Corp. ( UTX ) - stated that its contracts with the DoD for the next two batches of engines for the F-35 fighter jet will result in combined cost savings of 7% to 8%. Pratt & Whitney stated that it had already cut costs of its F-35 engine by over 50%.
Lockheed Martin's F-35 JSF is the most pricey weapons system in U.S. history and has a potential price tag of $400 billion to $1 trillion.
This deal from South Korea for its super stealth fighter would mark a crucial victory for Lockheed Martin in response to Pentagon's budget cuts and delay in buying new jets. Foreign military sales have so far saved the day for these Goliaths in the face of crumbling defense budgets and a mature market.
Lockheed Martin currently holds a Zacks Rank #2 (Buy). Investors can also look into another defense company Air Industries Group ( AIRI ) sporting a Zacks Rank #1 (Strong Buy).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
