Lockheed Martin hired to provide missile defense for Hawaii

Discover the latest Lockheed Martin Earnings Call Transcript.

2018. What a year.

It’s been almost 12 months since the big “Fake missile alert in Hawaiioccurred. On January 13, at 8:07 a.m. local time, the Hawaii Emergency Management Agency mistakenly broadcast a warning about an incoming ballistic missile threat. Recipients may have been inclined to ignore the warning as a mere drill – but for the fact that the warning specifically urged them to understand that “this is not a drill.” Panic erupted across the islands, alongside calls for a defense enhanced missile defense in the US Senate.

Twelve months later, it’s starting to happen.

How much is too much to protect America from this? Image source: Getty Images.

Lockheed Martin to the rescue

Earlier this month, in an update of publicly disclosed contractsthe Pentagon has announced that it has awarded Lockheed Martin (LMT 0.86% ) $585.2 million to “design, develop and deliver” a “Homeland Defense Radar-Hawaii (HDR-H)” system to provide “autonomous acquisition and persistent precision tracking and discrimination to optimize defensive capability of the Ballistic Missile Defense System (BMDS) and to counter evolving threats.”

In a press release in response to the award, Lockheed Martin said it would use its Long Range Discrimination Radar (LRDR), currently under construction in Clear, Alaska, and expected to go live in 2020, “to provide the lowest risk and best value HDR-H solution for [the U.S. Missile Defense Agency]in Hawaii as well. HDR-H is to be built on the island of Oahu by the end of 2023.

Once both are ready, the LRDR and HDR-H will be integrated into Lockheed’s Ballistic Missile Defense System (BMDS), incorporating both on-board and “Aegis on the groundIn this way, Lockheed and the Pentagon will respond to Hawaii Congresswoman Tulsi Gabbard’s request that the military put “a missile defense system in place in Hawaii to defend Hawaii.”

LMT Chart

LMT given by Y-Charts

What this contract means for investors

Hawaiians should be happy to hear that. Lockheed Martin investors should also be very pleased. Thanks to the Hawaii Emergency Management Agency snafu, their company is set to receive $585 million in additional revenue that would otherwise never have been awarded.

Granted, for a company as big as Lockheed Martin, with annual revenue of $51 billion, even half a billion dollars won’t do much. The whole of this contract, spread over five years of execution, will represent barely 0.2% of the company’s annual activity. Still, there are at least a few reasons why investors might want to pay attention.

The first reason has to do with where Lockheed will funnel its ballistic missile defense revenue. by. Although it is a missile tracking and shooting system along with other missiles, Lockheed does not record HDR-H revenue as part of its Missiles and Fire Control (MFC) business, as you would expect, but more as part of its rotating and mission systems. (RMS).

RMS is the division whose profit margin was artificially depressed two years ago when it absorbed low-margin Sikorsky helicopter business of United Technologies, dropping its operating margin almost instantly from 7.9% (in 2015) to just 5.9% (in 2016), with a further drop to 5.6% in the last 12 months. (For context, this is less than half of Lockheed Martin’s overall profit margin of 11.6%). The fact that Lockheed has won the HDR-H contract, which is presumed to be more profitable than the revenue the company earns from Sikorsky, promises to help reverse this drop in profit margins in Lockheed’s second largest division. in terms of income.

The situation could improve further if the Pentagon decides to expand its investments in missile defense in the future. Lockheed notes that it is designing LRDR and HDR-H with an “open and scalable architecture for future growth”. This suggests that the company is hoping to win additional awards for higher-margin missile defense of a type similar to HDR-H. Lockheed Martin shares are currently trading for a rich 24 times earnings – earnings which, according to data from S&P Global Market Intelligence are not much better than what the company was earning five years ago – every little extra income counts.

And the bigger the profit margins on those revenues, the better.

Editor’s Note: A previous version of this article awarded Lockheed Martin’s HDR-H contract to the company’s Missiles and Fire Control business, rather than Rotary and Mission Systems. The madman regrets the mistake.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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