General Dynamics-Lockheed Score

Quick. Without looking it up, define "littoral."

If your answer is "the opposite of figurative," please go join Raytheon (NYSE: RTN  ) in the loser's circle for bidders on the Navy's new Littoral combat ship.

Yesterday, the Navy announced that Raytheon was the only one of three short-listed contractors not selected to continue designing its next-generation coastal waters warship. (The Navy did not comment on whether lexical aptitude was a criterion for winning one of the two contracts.) While the designs are not yet final, the work done on the project to date suggests that the Littoral combat ship is going to be a "stealthy" vessel with a very low profile and shallow draft, capable of performing multiple mission types (from combat to minesweeping to eavesdropping) in shallow coastal waters.

The Littoral combat ship contract winners were two teams led by Lockheed Martin (NYSE: LMT  ) , which won a $46.5 million contract, and General Dynamics (NYSE: GD  ) , which won a $78.8 million contract. Including options for follow-up work, these two contracts have a combined potential value of nearly $1 billion. And that is just the start. While the first prototype Littoral combat ship is not expected before 2006, a Congressional Research Service report postulated that up to 60 of the warships may ultimately be built, at a combined cost of roughly $12 billion. Thus, the builders will likely be responsible for the construction of 15% of our future 400-ship Navy.

Lockheed's teammates in the bidding were primarily specialty shipbuilders, but General Dynamics invited two large defense-contracting rivals into its camp: Northrop Grumman (NYSE: NOC  ) and General Dynamics' main British rival in the armored vehicle business, BAE Systems PLC (AMEX: BAE  ) . Clearly, General Dynamics has no qualms about cooperating with the competition if that is what needs to be done to win contracts.

It is not easy for a $19 billion company to make itself into a true Rule Breaker. Still, General Dynamics is certainly demonstrating a willingness to adapt its business to the military's evolving needs, working on remote-operated weapons systems; rapidly deployable, trackless armored vehicles; and now, stealthy, modular warships like the Littoral combat ship. It seems to this Fool that, out of all the nation's defense contractors, General Dynamics has the best grasp of where the future of military hardware is headed. And a quick glance at the company's stock chart suggests that this view is popular among our fellow investors as well, for the company has nearly doubled in value since March 2003.

Share your thoughts on our General Dynamics discussion board.

Fool contributor Rich Smithhas no ownership interest in any of the companies mentioned in this article (but he thinks their products are way cool).


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