It’s been a good three years since there was anything left to say about the US Missile Defense Agency’s “Next Generation Interceptor” project – a plan to build and buy likely thousands of interceptor missiles to place an anti-missile shield over the United States. Three years of calm. .. broken by an explosion of good news for Lockheed Martin (NYSE:LMT) last week.
On Monday, Lockheed announced that MDA had awarded it a prime contract to build “the most modern, reliable and technically advanced interceptor in the history of the mid-course ground defense system.” In a separate statement, MDA added that Lockheed and an unnamed rival (what was Northrop Grumman) submitted preliminary designs for competing interceptor missiles – a $1.6 billion reward split between the two teams – but Lockheed came out on top.
Boeing And Raytheon had already competed for the contract. Boeing, having built the original GMD system, was one of the favorites to win the upgrade work, but Boeing dropped out of the NGI competition in 2019, taking Raytheon with it.
This left Lockheed with only one enemy to defeat, and he did so. Now what investors want to know is: What’s next for Lockheed Martin?
Could $17 billion become $67 billion?
This is an important question for that first defense stock. Although neither Lockheed nor MDA mentioned NGI’s price in their press releases, media reports indicate that Lockheed will collect $17.7 billion over the life of the contract. And maybe this is just the beginning.
As my colleague Lou Whiteman pointed out in 2021, the United States spent a total of $67 to build the original GMD system. With inflation, it is to be expected that the new NGI project will eventually bring at least as much revenue at Lockheed’s door – and probably more. Of course, Lockheed will not be able to keep all the loot. It will share revenues among its subcontractors, including rocket specialist Aerojet Rocketdyne, now owned by L3 Harris Technologies. But as the project’s prime contractor, you must assume that Lockheed will keep the lion’s share of the wealth; At least $17.7 billion. And probably closer to $67 billion for missile defense.
What happens next?
It is important for investors to understand that this money will not come all at once, nor immediately.
Lockheed may have won the contract for NGI and will be paid as it works to complete the contract, but it still needs to go through several more steps before it can collect the bulk of the money – including a critical review of the design and flight testing of the interceptor. missiles and the integration of NGI into the existing GMD system.
Initial operational capability is still more than four years away, with MDA hoping to deploy defensive weapons by the fourth quarter of 2028. And Lockheed will (probably, eventually) clear all the technical hurdles necessary to reach that point. The company has a long history of successful work in missile defense, including building interceptor missiles for PATRIOT and Terminal High Altitude Area Defense (THAAD) missile defense systems. But even so, delays can occur over a multi-year period, and investors should expect them.
What this means for Lockheed Martin
Despite some reservations, this is clearly a big win for Lockheed, and perhaps even bigger than many investors realize.
According to data from S&P Global Market Intelligence, Lockheed Martin Missiles and Fire Control, the division that will build NGI, is the company’s smallest revenue contributor with “only” $11.9 billion last year. However, dollar for dollar in revenue, Missiles is also Lockheed’s most profitable division, generating an operating profit margin of just under 13% last year. (For comparison, Lockheed’s three other divisions – aerospace, rotary and space – all achieve margins closer to 10%.) In other words, each dollar of revenue generated by the missile division represents about 30% of more in Lockheed’s bottom line. than a similar dollar spent in one of the company’s three other major divisions.
And now Lockheed Martin looks likely to generate $17.7 billion (or $67 billion, or more) from this profit powerhouse of a missile division.
So yes, we may have to wait a few more years before Lockheed fully benefits from this contract. However, with a big windfall at the end of the effort, I think investors will be happy to wait as long as it takes for NGI to come to fruition.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.
Everything you need to know about Lockheed Martin’s new $17.7 billion missile deal was originally published by The Motley Fool
