F-35 Crossroads: Navigating Lockheed's Near-Term Pain for Long-Term Gain

The F-35 Joint Strike Fighter program, a cornerstone of 21st-century airpower, stands at a pivotal juncture. For Lockheed Martin (LMT), the near-term financial pressures from delayed Pentagon payments and TR-3 certification uncertainties loom large. Yet the program's strategic indispensability—bolstered by global demand and geopolitical tensions—suggests resilience. For investors, the question is clear: Is Lockheed a hold until program stability is proven, or a buy into tailwinds of technological and geopolitical necessity?

Near-Term Risks: Cash Flow Strains and Payment Holds

Lockheed's Q2 2025 results underscore the program's financial fragility. With the Pentagon withholding $3.8 million per F-35 until TR-3 certification is finalized, cash flow has been hit hard. A backlog of 408 aircraft—including the recently cleared 72-jet stockpile—adds to liquidity pressures. Free cash flow dropped to $955 million in Q1 2025, down from $1.3 billion a year prior, as delayed milestone payments and higher software costs bite.

The TR-3 milestone, while nearing completion, remains a bottleneck. Though Lockheed claims the software is “stable enough for combat,” a single unresolved combat capability prevents full Pentagon sign-off. Delays here could trigger further budget cuts in FY2026, where U.S. orders have already been slashed by 50% to 47 jets. With Congress and critics like Elon Musk scrutinizing costs, the risk of prolonged penalties—or even program slowdowns—cannot be ignored.

Long-Term Resilience: Global Demand and Strategic Imperatives

Despite near-term headwinds, the F-35's structural dominance remains unchallenged. With over 1,185 jets delivered globally and 20 participating nations, the program's scale is unmatched. Even as U.S. procurement wanes, international orders surge, particularly from Germany (which plans to buy 35 jets), Poland, the UAE, and others. These contracts, often funded by U.S. security partnerships, ensure steady demand.

The Block 4 upgrade—enabled by TR-3—adds further strategic value. By 2026, F-35s will gain the AN/APG-85 radar, AIM-260 missiles, and AI-driven mission systems, cementing the aircraft's role in multi-domain warfare. Lockheed's monopoly on fifth-generation fighters and its $100+ billion backlog (through Lot 19 production) suggest long-term earnings stability, provided TR-3 is validated.

Catalysts for Rebounding Investor Confidence

1. TR-3 Certification (H2 2025): Full Pentagon approval would unlock withheld payments, stabilize cash flow, and clear the path for Block 4 integration. A delay beyond late 2025 could reignite fears of program slippage.
2. FY2026 Appropriations: Congress's willingness to fund F-35s at 47 jets—despite cuts—reflects recognition of its strategic role. A bipartisan push to counter China's J-20 program could boost allocations.
3. Germany's F-35 Purchase: Berlin's decision to acquire 35 jets signals broader NATO reliance on the platform, potentially spurring other European buyers.

Investment Thesis: Hold for Clarity, Buy on Catalysts

For defense investors, patience is key. Near-term risks—cash flow volatility, congressional scrutiny, and software delays—argue for a hold until TR-3 is finalized. However, the program's structural advantages make Lockheed a long-term buy once uncertainties abate.

Post-Q2 2025 Earnings: Look for signs of TR-3 progress and cash flow stabilization. Historically, when Lockheed has beaten earnings expectations, the stock has shown a positive short-term response. From 2022 to present, such events led to a maximum 1.01% gain on day 41, with a 54.55% win rate over three days. However, the effect tends to fade over time, with 30-day win rates dropping to 36.36%. A resolution by late 2025 could catalyze a rebound.

• ETF Play: Investors wary of single-stock risk might consider iShares U.S. Aerospace & Defense ETF (ITA), which includes Lockheed, Raytheon, and Northrop Grumman. ITA's 10-year annualized return of ~12% reflects sector resilience.

Conclusion: A Program Worth the Wait

Lockheed's F-35 program is a classic case of paying for patience. Near-term financial pain is real, but the program's global utility—and the lack of viable alternatives—ensures long-term demand. Investors who hold through TR-3's final hurdles and watch for FY2026 budget clarity may well be rewarded. For now, the F-35 remains a bet on geopolitical necessity—a bet that, in an era of great-power competition, looks increasingly prudent.

Hold for now. Buy the dip when TR-3 is signed off.