Lockheed's Secret War: Driving Down Costs of Military and Space Missions

Jet fighters, helicopters and missile systems are really important. Yet, designing and building them is just a small part of what Lockheed Martin (LMT) engineers do every day.

The Maryland company is known as a Pentagon contractor. But it's really a cutting-edge solutions provider. Its engineers are building processes to colonize Mars, 3D-print satellites, colonize space and save Earth with powerful data analytic platforms.

Lockheed is solving the world's biggest problems. But this fact is easy to miss. After all, defense and aerospace businesses are routinely misunderstood. That's largely because analysts undervalue engineering talent based on escalating costs for defense projects.

Related story: Investors Must Take a Shot at Pentagon Contractor Stocks

For example, in 2014, the lifetime cost of the F-35 jet fighter program was estimated at $1.5 trillion. That would have made it most-expensive weapons project in the history of the U.S. military.

At the time, the cost of a single Air Force F-35A was $148 million. And that was only the production costs. There were additional expenditures for research, development testing and evaluation.

Only a few years later, costs are plummeting.

Lockheed engineers built the most-advanced fighter jet ever produced. Then, methodically, they found a way to dramatically reduce costs, using robotics, digitalization, software and 3D printing.

By 2017, a CNBC video report noted the cost of a F-35A had fallen to $95 million. That was a 35% decline from 2014, and a 60% haircut since the program inception, a decade ago.

Janet Nash, vice president of F-35 production, says during the next five years, prices will fall further — to $80 million. And she expects production will jump from four units per month, to 14, with improved build quality.

The same engineering prowess is being applied to Mars exploration ...

At its closest orbit, the Red Planet is 34 million miles away. Getting there will require new ways to store volatile fuel. Engineers must rethink most of what they now know about data science, terrestrial communication and solar electric propulsion.

They will have to build the biggest, most powerful Space Launch System ever imagined. And that's just to get everything off the ground.

Consider this challenge accepted ...

Lockheed is building the Mars Base Camp. It's like the current International Space Station, only way bigger. It will consist of two Orion command and control capsules ... a habitat for crew ... two large sets of fuel tanks and four massive solar arrays, for power and solar electric propulsion.

It is a massive project. It is fostering cutting-edge innovation. And it is happening inside Lockheed.

Meanwhile, the world is being captivated by reusable rockets that land autonomously. In theory, this would dramatically reduce the cost of satellite launches.

Lockheed engineers are looking even further ahead. They want to put a satellite factory into space, then 3D-print units.

It is not as far-fetched as it seems. Lockheed has already done it. The company 3D-printed parts for NASA's Juno Jupiter orbiter. Another satellite commissioned by the U.S. Air Force was designed and built using a 3D-printing technique called Laser Powder Bed Fusion.

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It is exactly what you might think. A bed of aluminum powder is precisely laid into place by a robotic arm controlled by a digital CAD file. A laser then melts the powder to form the custom part. The process reduces production cycles and costs.

3D-printing satellites in space would negate the need for expensive rocket launches. 

This is the same ingenuity engineers are using to solve cybersecurity and weather disruptions. While the two real-world problems might seem dissimilar, ultimately, they are about data. As a company, Lockheed and its predecessor businesses have decades of experience collecting and understanding data.

LM Wisdom is a predictive analytics and Big Data tool. The software collects and analyzes open source data from social media and a variety of other sources. It finds patterns, then provides actionable intelligence. Using this information to disrupt cyber threats has become a big business.

The company is collecting data from terrestrial sources, too.

Since 2009, Lockheed has gone all-in on its commitment to use its capabilities to monitor and understand Earth's atmospheric changes. Its expansive experience with powerful sensors, networks and custom satellites has provided valuable data input. The market for this data includes financial services, and government agencies trying to understand weather.  

It is all part of a very good business.

Since 2010, the operating performance has been spectacular. According to Morningstar, the return on assets has consistently been in the high-single-digit range. The five-year average return on invested capital is 34%, with operating margin of 11.2%.

That kind of performance made the stock a big winner. The five-year average compound rate of return is 32.8%. To put that in perspective, $10,000 invested in March of 2013 is now worth $41,303.

In a world full of equations, Lockheed Martin managers discovered the most valuable skill is problem-solving.

Best wishes,
Jon D. Markman

P.S. For more companies like LMT ... well-run, with fat margins and ample cash flow, not to mention a competitive edge that's second to none, consider taking my Power Elite newsletter for a test-drive. Click here to start receiving these kinds of recommendations, complete with detailed buy and sell instructions, in your inbox every month.

About the Contributor

Jon D. Markman is winner of the prestigious Gerald Loeb Award for outstanding financial journalism and the Society of Professional Journalists' Sigma Delta Chi award. He was also on Los Angeles Times staffs that won Pulitzer Prizes for coverage of the 1992 L.A. riots and the 1994 Northridge earthquake. He invented Microsoft’s StockScouter, the world’s first online app for analyzing and picking stocks.

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