Shares of defense giant Lockheed Martin plummeted Wednesday following a Bloomberg report that the US government would purchase a few F-35 jet fighters in the 2023 financial year. The size of the cut looks small, but investors are trading anyway, probably because of other factors.
Lockheed shares (tick: LMT) were down 6.8% to $ 418.27. The S&P 500 and Dow Jones Industrial Average were up 1.3% and 0.9%, respectively.
About 33 flights appear to be the main cause of the daily decline. That's the number of planes cut off from the U.S. defense budget for 2023, according to Bloomberg.
"It is too early to speculate on the proposed defense budget before it is released," a Lockheed spokesman said when asked about the budget. "The F-35 is the most dangerous, survival and most connected fighter in the world today, and it strengthens our allies, blocks our enemies, and strengthens our economy."
All in all, the U.S. military ordering F-35 jets of about 2,400. Foreign troops have ordered 900 more. Lockheed had delivered about 750 by the end of 2021.
It looks like the demand for F-35 jets should continue in the future, but budget cuts could still affect Lockheed's 2022 financial results. (Government funding for 2023 starts in October 2022).
Currently, Lockheed has told investors it expects to sell $ 66 billion in 2022, with $ 6 billion in free cash flow and $ 26.70 billion in revenue per share. Wall Street speculation now fits that prediction. Analysts, for example, generated $ 66.1 billion in 2022 sales and $ 26.82 in EPS.
In 2021, Lockheed reported $ 67 billion in sales and $ 22.76 billion in EPS.
The US took about 60 to 85 jets a year, according to Capital Alpha analyst Byron Callan. He wrote on Wednesday that foreign governments could take any loopholes from the Department of Defense's lower-level requests, keeping F-35 production levels below expectations.
"We strongly suspect that DoD or overseas customers want to see a significant decline in current production [F-35 jets] due to the potential impact this on unit prices and the acquisition of the learning curve," Callan added in his report.
Wednesday's downturn eats up some of the most recent strong stock returns - a sign that fundamental profit margins may also play a role in the session. As of the day, Lockheed stock has increased by about 26% year-on-year to date.
The Russian-Ukrainian war has increased all defense stocks. Shares of Northrop Grumman (NOC), for example, have risen by about 14% per annum so far.
Investors also seemed to respond to positive actions about the European war. Shares in Northrop fell on Wednesday, about 5.6%.
Ukrainian President Volodymyr Zelensky recently pointed out that Russia's demands are becoming "more realistic." In addition, both sides spoke on Tuesday and were due to speak again on Wednesday.
This is good news, even if it leads to less pressure on the defense sector.
Shares of Lockheed and Northrop traded at about 15.6 times and 17.1 times the average earnings for 2022, respectively. That is a discount on the S&P 500 about 19 times. The small discount shows some caution among investors about U.S. military spending, given the huge budget deficit.
