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

Lockheed Martin (LMT) stands at a critical juncture for its F-35 Joint Strike Fighter program. The resolution of a backlog of 72 jets in Q2 2025 marked progress, but lingering software delays and Pentagon payment withholdings threaten near-term financial stability. Meanwhile, geopolitical demand for fifth-generation fighters and a $173 billion backlog suggest long-term resilience. Here's why investors should tread cautiously but remain optimistic.

The Backlog Resolution: A Win, But Not a Cure-All

Lockheed cleared its F-35 backlog by delivering all 72 jets parked in Texas by May 2025, a move that boosted Q2 revenue growth to 4% year-over-year. The Aeronautics segment's 3% sales rise to $7.06 billion and a 10.2% operating margin highlighted progress. However, this came at a cost: the Pentagon withheld $5 million per jet until TR-3 software fixes are finalized, creating a $100 million cash drag.

The result? Free cash flow fell to $955 million—down from $1.3 billion in Q1 2024—due to milestone timing and software investments. While Lockheed reaffirmed its $6.6–$6.8 billion free cash flow guidance for 2025, investors remain skeptical.

TR-3 Delays: The Elephant in the Hangar

The TR-3 software upgrade, critical for modernizing displays, processing power, and electronic warfare systems, has been delayed since mid-2023. This has caused:
- Payment Withholdings: The Pentagon maintains a $5 million per-jet hold on 72 jets delivered through May 2025, and new deliveries face similar blocks.
- Margin Pressures: Analysts at Zacks downgraded LMT to "Sell," citing valuation discounts (12x forward earnings vs. a 5-year average of 18x) and TR-3 uncertainties.

The software's delayed certification has also slowed U.S. Air Force deliveries, with domestic orders cut 50% in FY2026. Yet, Lockheed's 25–30% revenue reliance on F-35 means success here is existential.

Pentagon Cuts vs. Global Demand: A Balancing Act

The DoD's shift toward hypersonic systems and next-gen fighters like the F-47 (Boeing's F-47 contract is a key competitor) has reduced F-35 procurement. However, international demand remains robust:
- Backlog Strength: $176 billion in orders, with 45% from overseas buyers (up from 30% a decade ago). Key allies like the UK, Italy, and Australia are expanding fleets.
- Pent-Up Demand: Resolving TR-3 could unlock annual deliveries of 170–190 jets, stabilizing revenue.

Congressional pushback often reverses defense cuts, as seen in the FY2025 NDAA, which mandated TR-3 progress updates.

Competitor Dynamics: RTX and Boeing's Role

1. Raytheon Technologies (RTX):
2. F-35 Role: Supplies avionics and engines via Collins Aerospace. Its $134 billion backlog includes $9 billion in defense contracts.

3. Valuation: RTX trades at 17.36x EV/EBITDA, 32% below the industry median. Its 40% revenue from high-margin aftermarket services offers stability.

4. Boeing (BA):

5. Indirect F-35 Impact: Supplies engine parts but focuses on F-47. Boeing's F-47 win—valued at $20 billion—highlights its pivot to cost-plus contracts after past fixed-price failures.
6. Risks: Execution concerns linger over its history of overruns (KC-46 tanker, Starliner).

Both competitors pose threats but also underscore defense sector tailwinds. RTX's valuation discount and Boeing's F-47 bet suggest LMT's dominance isn't unassailable.

Investment Thesis: Hold with a TR-3 Trigger

Hold Rating:
- Near-Term Risks: TR-3 delays, free cash flow volatility, and valuation discounts.
- Catalyst Watch: The July 22 earnings call will clarify TR-3 timelines and margin trends.

Buy Trigger: Full TR-3 certification by late 2025 would unlock withheld payments, stabilize margins, and reignite investor confidence. A "buy" could then target LMT's 5-year average P/E of 18x, implying a 40% upside from current levels.

Conclusion

Lockheed Martin's F-35 program is at a crossroads. While the backlog resolution and $173 billion backlog offer long-term resilience, TR-3 delays and Pentagon shifts create near-term headwinds. Investors should hold LMT while monitoring TR-3 progress. A successful resolution could turn this undervalued stock into a multi-year growth story. Until then, patience is the watchword.

Risk Factors: Geopolitical tensions, software certification delays, and congressional budget disputes remain key uncertainties.

Final Note: Defense stocks often trade on geopolitical risk. With rising Indo-Pacific tensions and NATO modernization, LMT's F-35 dominance could prove decisive.