U.S. government supports that business to the tune of over $37.7

billion. It surpasses its closest competitors, Boeing and Raytheon, by

nearly $20 billion in arms sales.

These funds are granted by Congress to provide equipment that enables the

U.S. military to protect the country at home and abroad.

So why is Lockheed the defense darling of the U.S.

government? And how did it beat out its competitors?

One of the top priorities of all administrations is the protection and

safety of the American people.

To ensure that, politicians work with defense contractors to provide

equipment to the military.

This partnership provides a unique opportunity for private corporations to

execute the will of the government and requires a delicate balance.

President Eisenhower, in his farewell address, coined the term

military-industrial complex.

And what he was talking about was the close connection and collaboration

between arms contractors and uniformed military.

In the councils of government, we must guard against the acquisition of

unwarranted influence, whether sought or unsought, by the

military-industrial complex.

The political incentives of the U.S.

Congress and the Department of Defense tended to work together in a way

that created enormous incentives to increase military spending.

For example, when there's a major weapons program like, say, the F-35,

which is the current Air Force combat aircraft, is being purchased,

members of Congress might have questions about this plane like is it

performing well? Are we getting a good deal for our money and so forth.

They are reluctant to vote against it because it means going up against

potential jobs in their states.

The Congress people in whose district those companies are located and the

Defense Department that then gets to use the equipment that is purchased

in this way. And Eisenhower believed that that complex of the military,

the industry and the government, the Congress in particular, created a

tendency for the United States to overspend on national security.

For most of the defense industry, their biggest source of business is the

Department of Defense. So they kind of live and die with the defense

budget as it increases, the revenue increases, as it decreases, the

revenue decreases.

Waging an actual war is a very expensive project.

The 9/11 attacks in 2001 were a shock to the American psyche, led to a

substantial ramping up of U.S.

military spending in the years after 2001, partly because of the immediate

issue of terrorism and partly because of the closely related but second

order problems of the wars that the counterterrorist program led to in

Afghanistan and Iraq.

The price tag gets huge.

And so American defense spending has grown radically since 2001 and

remains very high.

And Lockheed Martin is the top-contracted company by the U.S.

government. In 2018 alone, the company sold $37.7

billion worth of contracts to the U.S.

government, making up 70% of their net sales.

The other 28% came from foreign military sales and 2% came from commercial

and other customers.

Lockheed's total revenue in 2018 was about $53 billion.

By contrast, Lockheed's next biggest competitor, Boeing, was awarded about

$23 billion from government contracts the same year.

So even though Boeing is a much larger company with $101 billion in total

revenue in 2018, only a small portion of its business relies on defense

contracts. Boeing might be a prominent example where they do get a lot of

revenue from the commercial business falling, in fact, it's about two

thirds of its revenue from commercial aviation, about a third from its

defense business. Boeing mostly makes planes for commercial airlines, but

it also has a robust business making military aircraft and other weapons.

The next largest competitor is Raytheon.

Raytheon is a prominent defense firm that offers services in everything

from cybersecurity to missile defense.

68% of Raytheon's net sales came from the U.S.

government in 2018, which means about $18.4

billion. They list their principal U.S.

government customer as the U.S.

Department of Defense, as does Lockheed Martin.

However, before Lockheed Martin got this very crucial customer, it

struggled to define its identity.

Glenn L. Martin opened his aviation company on August 16th, 1912.

The company went on to become one of the earliest suppliers of the U.S.

military, making aircraft for both the army and the navy.

They went on from success to success through the twenties and the thirties

pioneering all sorts of new aircrafts, but particularly military

airplanes. In 1961, the second Glenn L.

Martin Company merged with the American Marietta Corporation.

It was renamed the Martin Marietta Corporation.

The same year, Glenn Martin launched his aviation business,

the Lockheed brothers launched their aviation business, the Alco Hydro

Aeroplane Company, which was later named Lockheed Aircraft Company.

Lockheed, L-o-u-g-h-e-a-d, is pronounced like Lockheed.

People had a hard time pronouncing it that led to the brothers legally

changing the spelling of their surname to Lockheed.

Malcolm went on to start a successful car hydraulic brake company, and

Alan resigned after the company was bought by Detroit Aircraft

Corporation. But the company didn't last long and fell into receivership

under the Title Insurance and Trust Company of Los Angeles, officially

killing Lockheed Aircraft Corp.,

which was a subsidiary.

Its assets were sold off to Robert Gross and other investors who went on

to form a new Lockheed Aircraft Corporation of Delaware.

Lockheed Aircraft Corporation changed its name in 1977 to Lockheed

Corporation to demonstrate they offer other services besides aviation.

Those two companies, the Martin Marietta Corporation and Lockheed

Corporation, were two prominent competitors in the defense marketplace.

However, that marketplace has never been completely independent of the

government's actions, just as President Eisenhower had warned when he

spoke of the military-industrial complex.

Military procurement had declined around 52% from 1985 to 1997 in current

dollar terms. Before 2001, many people believed that

national security had become a lot easier with the end of the Cold War and

that the United States could take what was referred to at the time, a

peace dividend. The much larger defensive efforts that the United States

had made during the Cold War when we had to fight Soviet Union weren't

necessary anymore when the Soviet Union collapsed and the Cold War ended.

So defense budgets tended to decline.

Leadership at the Department of Defense inferred that the defense industry

would have to shrink around 40% in order to save the industry from

collapsing amid declining demand from the department.

Officials encouraged companies to consolidate in an effort to save each

other. At the end of the Cold War, there were concerns about whether the

Pentagon budget, which was going to come down about 10 to 25 percent or so

was projected in real terms.

Could that smaller budget sustain the same number of contractors?

And William Perry, the secretary of defense, in the administration felt

the answer was no. In fact, in 1993, the government asked specifically for

less competition among defense contractors.

Look to your left. Look to your right.

One of your companies is not going to be here in a couple of years.

And then you also had the infamous Last Supper.

We think there are too many companies in this business and we want to

merge and combine with one another at reduced costs to us, overhead costs

at the corporate level. Norm Augustine kind of engineered the whole series

of mergers. Infamously or famously, Norm Augustine who at the time was the

head of Martin Marietta was at the table with a bunch of other industry

haters. And he was one of the most aggressive executives taking that

guidance and running with it.

And he became CEO of the combined Lockheed Martin and also consolidated

and purchased lot of other companies. Lockheed Martin absorbed large

companies like Ford Aerospace and Loral Corporation.

Basically the big winner and that consolidation after the Last Supper was

Lockheed Martin. It was after that that Lockheed aircraft and Martin Mary

had emerged. In 1958, Lockheed Martin proposed to Northrop Grumman and the

government actually told them not to do that.

They cancelled that transaction.

They said they wouldn't approve it and the idea was dropped.

So that was that's kind of, if you will, the sort of the generally

accepted end of the the Last Supper consolidation era.

By 2000, the industry had consolidated into the marketplace we know today

with Lockheed on top. So the way the industry is structured now, the

barriers to enter are huge. Unless they brought up some of the existing

companies, you're only going to have a couple of competitors for most

things you might want to do. Lockheed Martin now

stretches into four business segments: Aeronautics, Missiles and Fire

Control, Rotary and Mission Systems and space.

It's a company that has combined with other companies over time to gain

its current market position as the largest company in the world.

In 2019, Raytheon and United Technologies announced intention to merge to

have a better edge on the defense industry.

To protect their profits, companies like Lockheed Martin also sell their

aircraft to American allies when cleared by the State Department.

When the defense budget in the U.S.

started to fall, a lot of companies really amped up their work to sell

products overseas.

So depending on the company, that's probably now like 25 to 30 percent of

their revenue may come from international sales.

That's one way the government controls the defense marketplace.

Another way is through direct negotiations with industry CEOs.

In the 2017 fiscal year, the then president, Barack Obama, proposed a

budget of $582.7

billion for the Department of Defense.

The following year in 2018, President Trump proposed a budget of $639.1

billion. For the fiscal year 2019,Trump proposed a budget of $716

billion for national security, with $686 billion for the Department of

Defense. And looking to the future, Trump proposed a budget of $750

billion with $718.3

billion going to the Department of Defense for the fiscal year 2020.

The company was well positioned in the Obama years as well because, you

know, he actually spent significant money in this decade, which includes

most of the Obama two terms.

We've spent a trillion more on the Pentagon than in the prior decade,

which was at the peak of the Iraq and Afghan wars.

President Barack Obama appointed Lockheed CEO Marillyn Hewson to the

president's export council in September of 2013.

Marillyn Hewson from Lockheed Martin.

Obviously, one of our greatest innovators and one of those innovations is

the F-35 fighter jet.

It is the most advanced fighter in the world.

It's stealth. You cannot see it.

Is that correct? That's correct.

Better be correct. Right? A single F-35 can cost over $80 million and the

government hasn't always been happy with the F-35's performance and price.

Then President-elect Donald Trump thought the F-35's program delays and

high costs were bad for business.

This one from the president-elect based on the tremendous cost and cost

overruns of the Lockheed Martin F-35, I've asked Boeing to price out a

comparable F-18 Super Hornet.

This caused Lockheed Martin shares to fall around 2% and sent Boeing

shares up 0.5%.

In January 2017, Trump commented on the tension of his negotiation with

Lockheed Martin. Look at what's happening with Lockheed.

Number one, we're cutting the price of their planes by a lot, but they're

also expanding. And that's going to be a good thing.

Ultimately, they're going to be better off.

Hewson is actually in this very interesting sweet spot where the defense

budgets never been bigger under any presidency.

So that gives her company a lot of leeway to snatch up a lot of those

contracts. I don't see any realistic chance that there's another company

that's going to exceed Lockheed Martin in the next five years.

Lockheed Martin will be delivering 478 F-35 aircraft to the U.S.

government under their biggest deal yet, a $34 billion contract with the

Pentagon. In 2019, the U.S.

government also approved the sale of 32 F-35 jets to Poland for around

$6.5 billion so the company is poised to be successful among allies as

well. When you look at Lockheed's diverse portfolio and you pair that with

a defense budget at a tune of $700 billion, of course Lockheed is prime

suited to pick up more government contracts and to ride even more of a

successful wave.