Driving Forward in the Tank Industry

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The Bradley Infantry Fighting Vehicle has been in service since 1981 as the United States' go-to ground combat vehicle (GCV).

BAE systems has a subsidiary in the US which has made these vehicles for the Gulf War and the Iraq/Afghanistan Wars and hopes to continue to do so with Northrop Grumman (NYSE: NOC) as its partner for the next ground combat vehicle. BAE and Northrop are competing against General Dynamics (NYSE: GD), the maker of the United States main battle tank the M1 Abrams, for the $29 billion contract to make the next GCV for the US.

Both BAE/Northrop and General Dynamics have received money (around $400 million each) from the Department of Defense (DoD) for research to make the best new GCV they can by 2019. By 2019 the DoD will choose who wins the contract and gets the rewards of upgrading the United States' military.

The BAE/Northrop group wants to have a hybrid tank (see links) for the next GCV, which will have an electric battery that can significantly save on fuel. This hybrid will burn only 4.61 gallons while idling for an hour compared to 10 gallons for the existing Bradley tank, but it is also twice as heavy as the Bradley as it can fit three more people inside it and has significantly more armor than the Bradley. The hybrid tank will be 10-20% more fuel efficient than another vehicle of the same size, according to BAE.

General Dynamics has said it won't make a hybrid tank because the tank tracks stop the electric battery from gaining a lot of its charge back as it brakes. When a Prius brakes some of that forward momentum is given back to the battery as charge, but the tank tracks absorb most of that forward momentum and doesn't give back that much charge. BAE/Northrop's hybrid will cost around $9.5-11 million while General Dynamics will only cost $9 million per tank. Keep in mind though that the DoD is looking to pay around $13 million per tank.

Whoever wins the contract will see some nice upside potential while the other will drop as the speculation in the current stock price goes away. I would bet on the BAE/Northrop tank because even though it is more expensive, it is a hybrid and burns significantly less fuel while still being very heavily armored. Being more fuel efficient would reduce the cost of the tank versus another in the long run and could be pitched as "more environmentally friendly."

This tank can turn off its engine and go into stealth mode while still being able to use surveillance equipment to scan the battlefield. In this day and age where the battleground has changed so significantly, being stealthy is extremely important. While out in the middle of a desert if you are making an enormous amount of noise then everyone will know where you are. But if you lay and wait in silence while still being able to figure out where the enemy is would be a very strong selling point, especially when you consider the kind of enemies we are fighting today who tend to be guerrilla fighters.

General Dynamics has revenue (TTM) of $31.34 billion while Northrop Grumman has revenue (TTM) of $25.12 billion. Winning this contract could boost their growth rates could boost General Dynamics growth rate by 6% or Northrop's by 8.5% over the next 10 years.

Obstacles

The CBO has said that they don't want to see the $29 billion program go through and they would rather have the DoD upgrade the Bradley or use a different vehicle from Germany or Israel. The military has struck back saying this isn't about the money, it is about the fighting capability on the ground which is lacking with outdated GCVs. This will provide some headwinds for the program because the CBO did say that they could save $14 billion if the DoD went with Germany's Puma or $9 billion upgrading the Bradley's, but I'm assuming the military will get its wish and get themselves a new tank. 

If the Democrats take the House in 2014 maybe the program could get delayed (or canceled) as they want to cut defense spending overall. This is why the sequestration was heavily weighted towards the military and DoD. Historically speaking there is a very tiny chance of that happening, with Obama's approval rating in the negatives and below 50 combined with all the scandals (IRS, AP, Benghazi).

If anything in the 2014 election the Republicans have the best chance of winning because they need to take 6 seats in the Senate and 7 seats the Democrats are defending are in very conservative states. Combined with 3 of those 7 incumbents are retiring and not running again, it seems the Republicans will still have significant sway in Congress and will be able to get the tank program to move forward. Republicans like John McCain have expressed strong support for updating our military and would love for this program to go ahead.

To the moon!

Lockheed Martin Corp (NYSE: LMT) is making the Orion Multi-Purpose Crew Vehicle for NASA (which was announced back in 2006) and by 2014 will have its exploration flight test in 2014.The contract could be worth up to $8.15 billion when its all said and done.

This contract doesn't have to do with the DoD but it still is a big thing for Lockheed Martin. If the test flight goes well then Lockheed will be able to make a fair amount of money making of the Orion and the services that are required to keep the program going.

NASA has seen its budget get slashed as the recession hit, but this program is still progressing forward and most likely won't be canceled.

Final Thoughts

Contracts for upgrading the military's existing infrastructure are very lucrative and pay dividends for decades, as evidenced by BAE's 32-year stint with the Bradley. Whoever wins will see increased revenue and profit growth over the next several years.

The advancement of the Orion program is important to Lockheed Martin as it will help solidify its dominance of the sky (Lockheed also won the F-35 contract worth $391.2 billion) and will offer Lockheed growth beyond the DoD. Both of these contracts and programs will be important to follow in the coming years.


Callum Turcan has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics, Lockheed Martin, and Northrop Grumman. 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!

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