It’s been just over three years since there was anything to say about the US Missile Defense Agency’s Next Generation Interceptor project – a plan to build and buy likely thousands of interceptors to create a missile shield over the US. Three years of silence. .. shaken by an explosion of good news for Lockheed Martin (NYSE:LMT) last week.
On Monday, Lockheed announced that MDA has awarded it a prime contract to build “the most modern, reliable and technically advanced interceptor in the history of the ground-based midcourse defense system.” In a separate statement, MDA added that both Lockheed and an unnamed rival (which was Northrop Grumman) submitted preliminary designs for competing interceptor missiles – itself a $1.6 billion prize split between the two teams – but Lockheed prevailed.
Boeing And Raytheon had also previously applied for the contract. Boeing, which built the original GMD system, was considered the favorite to win the modernization work, but Boeing dropped out of the NGI competition in 2019, taking Raytheon with it.
This left Lockheed with only one opponent to defeat, and it succeeded. What investors want to know now is: What’s next for Lockheed Martin?
Could $17 billion become $67 billion?
That’s an important question for this leading defense stock. While neither Lockheed nor MDA have stated a price for NGI in their press releases, media reports indicate that Lockheed will raise $17.7 billion over the life of the contract. And that could be just the beginning.
As my colleague Lou Whiteman pointed out in 2021, the US spent a total of $67 to build the original GMD system. Given inflation, one has to expect that the new NGI project will bring something at some point at least that much sales to Lockheed’s door – and probably more. Sure, Lockheed won’t keep it all The prey. The revenue is split among its subcontractors, which include rocket specialist Aerojet Rocketdyne, now owned by L3 Harris Technologies. But as the project’s prime contractor, one has to assume that Lockheed will keep the lion’s share of the assets for itself; At least $17.7 billion. And probably more like $67 billion for missile defense.
What’s next?
It is important for investors to understand that this money will not flow all at once or immediately.
Lockheed may have won the NGI contract and will be paid to fulfill the contract, but it still has to go through several more phases before it can receive the bulk of the money – including a critical design review and flight tests of the interceptor missiles and the integration of NGI into that existing GMD system.
Initial operational capability is still more than four years away, and MDA hopes to deploy the defensive weapons by the fourth quarter of 2028. And Lockheed will (probably eventually) overcome whatever technical hurdles are required to get to that point. The company has a long history of successful work in missile defense, including building the interceptor missiles for both PATRIOT and the Terminal High Altitude Area Defense (THAAD) missile defense systems. However, delays may occur over a period of several years and investors should expect this.
What it means for Lockheed Martin
Caveats aside, 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 NGI will build, was the company’s smallest revenue earner with “just” $11.9 billion last year. Dollar for revenue dollar, however, Missiles is also Lockheed’s most profitable division, generating an operating profit margin of nearly 13% last year. (For comparison, Lockheed’s other three divisions – aerospace, rotary missiles and space – all generate margins of about 10%.) In other words, every dollar of revenue generated by the missile division adds about 30% to Lockheed’s bottom line worth more than a similar dollar flowing through all of the company’s other three major departments.
And now Lockheed Martin stands to make $17.7 billion (or $67 billion or more) from this profitable missile division.
So yes, it may be a few more years before Lockheed fully benefits from this contract. However, given the large pot of gold at the end of the effort, I suspect investors will be happy to wait until NGI comes 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 contract was originally published by The Motley Fool