Can Raytheon Turn Iron Into Gold?
Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You may not realize it from the storybook views of the profession, but the fabled alchemists of history gave rise to modern-day chemistry and the scientific model we still use today. Sure, the millions of attempts at creating the Philospher’s Stone – which was believed to have the power to turn base metals into gold and silver – came up empty-handed. But perhaps we were looking in the wrong place all along.
Just last week Raytheon (NYSE: RTN) came one step closer to turning iron into gold. The formula, you ask?
- A $290 million check from Uncle Sam.
- Some improved algorithms from Israeli-owned Rafael Advanced Defense Systems.
- Stir lightly with some bipartisan flair.
- Brew with a regional shoving match for 7-10 days.
Viola! The highly publicized Iron Dome of Israel achieved success rates between 87-90%, much higher than a recent U.S. Congressional report’s (opens PDF) estimate of 80% and much, much higher than what was thought feasible just a few years ago. The air-defense system was funded and built after the 2006 Second Lebanese War between Israel and Hezbollah, which put an estimated 1 million Israeli citizens in range of cross-border rockets.
I may have a problem with how they spell “defense,” but the Iron Dome is about as awesome as it gets. Source: Heavy.com
There are currently 5 mobile batteries in the Iron Dome system with 8 more in the works. Each battery comes with a base price tag of $50 million plus about $40,000 for each interceptor missile (Israel fired nearly $30 million worth of interceptor missiles during the recent conflict). All components of the system – software, Tamir interceptors, batteries – are built by Israeli-owned defense agencies, but that could change as demand grows and U.S. companies are tapped to increase capacity. In the last month alone defense-minded regions such as South Korea, India, and former Soviet satellite nations have inquired about buying an Iron Dome of their own.
The Best Offense Is a Good Defense
While the Iron Dome is fully Israeli-owned and operated there is a $290 million asterisk (not including future funding for improvements and expansion) that will provide a lucrative opportunity for U.S. defense contractors Raytheon and Lockheed Martin (NYSE: LMT). Uncle Sam agreed to write a check to speed-up the initial build-out of the Iron Dome as long as Raytheon obtained the rights to sell the technology and its derivatives to U.S. military applications. In that scenario, Lockheed Martin Missiles would supply the interceptors.
This is important for several reasons. Raytheon and Lockheed know what it takes to build an internationally acclaimed air-defense system, which debuted during the Iraq War as Patriot. Today the long-range air-defense system (Iron Dome is short-range) is in service in Egypt, Germany, Greece, Israel, Japan, Kuwait, the Netherlands, Saudi Arabia, and Taiwan. Israel has plenty of innovative defense companies, but would likely seek American help and experience in rolling out Iron Domes around the world.
Another big feather in the Iron Dome’s cap is its ability to avert costly escalations of conflicts. Despite lasting just one month, the 2006 Second Lebanese War cost Israel $3.5 billion and chopped 0.9% off its economic growth. In comparison, the Iron Dome would only cost about $80 million per month while simultaneously negating the need for a ground invasion – costing $380 million per day – to root out rocket positions. No wonder countries are jockeying for position to buy one of their own.
It will be tough for Israel to keep the U.S. out of international expansion of the Iron Dome when it receives an annual red, white, and blue check for $3 billion in military aid. In the PDF linked above, The House Armed Services Committee stated “[the U.S.] should explore any opportunity to enter into co-production of the Iron Dome system with Israel, in light of the significant US investment in this system.” President Obama promised future support for the system as recently as Nov. 21. As you can see it won’t be very difficult for the U.S. to muscle out a big piece of the pie for Raytheon and Lockheed, which could provide billions in revenue over the next ten years.
Any collaboration between the two countries makes perfect sense. Israel’s multi-layer air defense system, which includes a medium-range air-defense system (David’s Sling) and long-range air-defense system (Arrow), would benefit from American experience and know-how. In the end the initial $290 million investment could become a multi-bagger for the U.S. military.
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BlacknGold has no positions in the stocks mentioned above. The Motley Fool owns shares of Lockheed Martin and Raytheon Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!