News

It's been a good three years since there was anything to say about the U.S. Missile Defense Agency's "Next Generation Interceptor" project -- a plan to build and buy probably thousands of interceptor missiles to put a missile shield over the U.S. Three years of quiet... shattered 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 on competing interceptor missiles -- itself a $1.6 billion award split between the two teams -- but Lockheed came out on top.

Boeing and Raytheon had previously also competed for the contract. Boeing, having built the original GMD system, was a favorite to win the upgrade work, but Boeing dropped out of the NGI competition in 2019, taking Raytheon with it.

That left Lockheed with only one foe to vanquish, and it's accomplished that. Now what investors want to know is: What comes next for Lockheed Martin?

Could $17 billion become $67 billion?

It's an important question for this leading defense stock. While neither Lockheed nor MDA mentioned a price tag for NGI in their press releases, media reports indicate that Lockheed will collect $17.7 billion over the contract's lifetime. And that could be just the start.

As my colleague Lou Whiteman pointed out in 2021, the U.S. spent a total of $67 building the original GMD system. With inflation, you've got to expect that the new NGI project will eventually bring at least that much revenue to Lockheed's door -- and probably more. Sure, Lockheed won't get to keep all the loot. It will share the revenue among its subcontractors, which include rocket specialist Aerojet Rocketdyne, now owned by L3 Harris Technologies. But as prime contractor on the project, you have to assume that Lockheed will keep the lion's share of the wealth for itself; $17.7 billion at least. And probably closer to $67 billion for missile defense.

What comes next?

It's 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 fulfill the contract, but it still must pass multiple further stages before it can collect the bulk of the money -- including critical design review, flight testing of the interceptor missiles, and integrating NGI into the existing GMD system.

Initial operational capability is still more than four years away, with MDA hoping to field the defensive weapons by the fourth quarter of 2028. And Lockheed will (probably, eventually) pass all the technical hurdles needed to reach that point. The company has a long history of successful work in missile defense, including building the interceptor missiles both for PATRIOT and for the Terminal High Altitude Area Defense (THAAD) missile defense systems. But even so, delays can crop up over the course of a multiyear timeline, and investors should anticipate this going in.

What it means for Lockheed Martin

Caveats notwithstanding, this is clearly a big win for Lockheed, and maybe 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 at "only" $11.9 billion last year. Dollar for revenue dollar, however, Missiles is also Lockheed's single most profitable division, generating an operating profit margin just shy of 13% last year. (For comparison, Lockheed's other three divisions -- aeronautics, rotary, and space -- all earn closer to 10% margins.) In other words, each dollar of revenue run through the missiles division is worth about 30% more to Lockheed's bottom line than a similar dollar run through any of the company's other three major divisions.

And now Lockheed Martin looks likely to run $17.7 billion (or $67 billion, or more) through this profits powerhouse of a missiles division.

So yes, it may take a few more years before Lockheed benefits fully from this contract. With a big pot-of-gold windfall at the end of the effort, however, I suspect investors will be happy to wait for as long as it takes to bring NGI 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.