Lockheed Martin's F-35 Crossroads: Near-Term Pain, Long-Term Gain?

Lockheed Martin (LMT) stands at a pivotal moment for its F-35 program, one of the largest and most contentious military procurement efforts in history. While delays in the TR-3 software upgrade and Pentagon payment holdbacks have clouded near-term financials, the program's structural advantages—from its global order pipeline to its monopoly position in fifth-generation fighters—suggest a compelling asymmetry of risk and reward. For investors, the question is whether the current turbulence in cash flow and Pentagon trust creates a buying opportunity or a warning signal.

The Near-Term Headwinds: Holdbacks, Software Delays, and Earnings Volatility

The most immediate challenge for Lockheed is the $5 million per aircraft payment holdback imposed by the Pentagon until TR-3 software fixes are validated. With roughly 20 jets delivered in Q2 2025, this amounts to a $100 million cash flow hurdle—a significant drag on liquidity. Combined with the DoD's decision to slash FY2026 F-35 procurement by 50% (from 48 to 24 jets), these factors have already dented free cash flow. In Q1 2025, free cash flow fell to $955 million from $1.3 billion in Q1 2024, driven by delayed milestone payments and higher software expenditures.

The TR-3 delays have also forced Lockheed to rely on inventory draws to meet delivery targets. An estimated 18% of 2025 deliveries were sourced from backlogged planes, masking the true pace of production and contributing to margin pressures. Meanwhile, the F-35's mission-capable rate—a key metric for Pentagon trust—remains stuck at 51.5%, far below the 75–80% target. This operational underperformance has fueled skepticism about the program's readiness and cost efficiency, with sustainment expenses rising 44% since 2018.

The Long-Term Opportunity: Monopoly Power and Global Demand

Despite these near-term hurdles, the F-35's strategic moat remains intact. With no direct competitors in fifth-generation fighters, Lockheed holds a monopoly over a $1.7 trillion addressable market spanning 20+ allied nations. Even as the U.S. scales back domestic orders, international demand—driven by rising geopolitical tensions—remains robust. For example, Japan, South Korea, and the UAE have all expanded their F-35 fleets in 2025, with orders set to accelerate post-TR-3 validation.

Furthermore, the F-35's modular design allows incremental upgrades (like TR-3) to sustain its relevance for decades. Once the software issues are resolved—a milestone Lockheed aims to achieve by late 2025—the program could unlock “pent-up demand” from delayed U.S. deliveries and international customers. The $173 billion backlog, which includes programs beyond F-35, provides a cushion against near-term revenue volatility.

Investment Thesis: Buy the Dip if TR-3 Milestones Hold

The key to unlocking value lies in the resolution of TR-3 delays. If Lockheed delivers on its commitment to validate the software by year-end, the Pentagon could resume withheld payments, easing cash flow pressures and restoring investor confidence. The upcoming July 22 earnings call will be critical: reaffirmed timelines for TR-3 fixes and clarity on FY2026 contract awards could catalyze a rebound.

Investors should also monitor geopolitical tailwinds. The U.S. and allies' focus on modernizing air forces—amplified by tensions in the Indo-Pacific and Eastern Europe—supports long-term demand for fifth-gen fighters. Even if FY2026 U.S. orders stay at 24 jets, global exports could fill the gap, especially if TR-3 restores Pentagon credibility.

Risks and Triggers to Watch

• Red Flag: A delayed TR-3 validation beyond 2025 could prompt further DoD budget cuts or congressional scrutiny, worsening cash flow.
• Green Light: Positive test results for TR-3 by Q4 2025, coupled with reinstated milestone payments, would likely lift shares.
• Geopolitical Catalyst: Escalation in regional conflicts (e.g., Taiwan Strait, South China Sea) could accelerate F-35 procurement timelines.

Conclusion: A Risk-Adjusted Buy at Current Levels

Lockheed's F-35 program faces near-term execution risks, but its structural dominance and the global shift toward air superiority spending create a compelling case for long-term investors. At current valuations—which already discount much of the near-term uncertainty—the stock presents an asymmetric opportunity. Post-earnings, buyers should focus on TR-3 progress and signs of contract normalization. For those willing to endure short-term volatility, the F-35's moat could deliver outsized rewards over the next decade.

Investment Advice: Consider accumulating shares of LMT on dips below $260 (a 15% discount to its 52-week high) if Q2 earnings reaffirm TR-3 timelines. Avoid chasing the stock higher without concrete program milestones.

This analysis highlights how Lockheed's F-35 backlog clearance is a litmus test for both its financial health and its future as a defense leader. The next few quarters will determine whether the program's challenges are a temporary setback—or a sign of deeper structural issues. For now, the bet remains on the F-35's unmatched strategic value.