Will the Biggest Defense Deal Ever ... Get Bigger?

Conventional wisdom would have you believe that the defense industry is dead. Conventional wisdom is wrong.

For years, we've been reading nothing but tales of doom about the defense industry, and as the U.S. Pentagon pares its budget, allies across the seas follow suit. And yet, at the same time that traditional buyers of weapons systems step back, a new breed of buyer is stepping up. Case in point: Last year we discussed a massive arms purchase that Saudi Arabia is negotiating for everything from Boeing (NYSE: BA  ) F-15 fighter jets to United Technologies (NYSE: UTX  ) Black Hawk helos and Raytheon (NYSE: RTN  ) rockets. In all, the price tag on this purchase is estimated at $90 billion, which if true, would make it the biggest weapons purchase ever.

And it's about to get even bigger.

Flush Saudis, armed with credit cards
Last week, we learned that Saudi Arabia is in the market for a few good warships as well. Now, this isn't a totally new development. As part of the $90 billion deal mentioned above, the Saudis have voiced a desire to purchase the new Littoral Combat Ships being built by General Dynamics (NYSE: GD  ) and Lockheed Martin (NYSE: LMT  ) . What we hear now, though, is that they're looking for even beefier battlewagons -- DDG 51 Arleigh Burke-class guided missile destroyers.

Built by both Northrop Grumman (NYSE: NOC  ) spinoff Huntington Ingalls (NYSE: HII  ) and General Dynamics, and equipped with Lockheed's Aegis missile defense system, the DDG would complement missile defense systems already in the Saudi's shopping cart -- and help secure the company against a threat from Iran.

What's it mean to investors?
How big of a deal is this? Some media reports say the DDGs would make up part of a $20 billion naval warship package. Others put the value at $30 billion. Either way, much of this purchase price is presumably earmarked for the LCS warships mentioned earlier. So we're probably only talking about a $3.5 billion bump to the biggest defense deal ever. Small potatoes, right?

In the grand scheme of things, perhaps. But remember that this additional revenue would be split among just three companies. Of these, a destroyer deal would most benefit newly independent Huntington Ingalls. The shipbuilder only takes in about $6 billion a year, after all. Two new destroyer contracts could really move the needle there.

My advice: Huntington Ingalls shareholders should watch this deal like a hawk. To do so, add it to your Fool Watchlist.

The Motley Fool owns shares of Northrop Grumman, Raytheon, General Dynamics, and Lockheed Martin, but Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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