In a time where fear over sequestration is running rampant and taking its toll on defense companies and their stocks, it's nice to hear a little good news. And a major contract is very good news --both for the companies and their investors.
What major contract?
Although the Joint Light Tactical Vehicle, or JLTV, project appeared to be dead, the Marines and Army scaled back their ambitions for the vehicle and have now taken an important step toward awarding a final production contract on the new JLTV.
That's great news for Lockheed Martin (NYSE: LMT ) , Oshkosh (NYSE: OSK ) , and AM General. All three companies beet out competitors General Dynamics (NYSE: GD ) , BAE Systems along with subcontractor Northrop Grumman (NYSE: NOC ) , and Navistar (NYSE: NAV ) , to be awarded a fixed-priced contract to enter the engineering and manufacturing development, or EMD, phase.
The race is on
The winner of the final contract has yet to be decided, but being awarded contracts to enter the EMD phase is a huge boon for these companies. With the Army and Marines expected to order around 55,000 vehicles, at a cost of $250,000 each, the final contract could be worth in excess of $13 billion.
For now, each company has 12 months to build 20 vehicles apiece for the government and has to put the vehicles through 1,000 miles of rigorous testing. That means that by August 2013, the military should be able to start the comparison and award a production contract by 2015.
What to look for
Each company has strengths and weaknesses that could help determine a winner. Oshkosh makes the M-ATV, the vehicle that is closest to what the military now wants. But Oshkosh wasn't able to garner enough interest to receive a technology development, or TD, contract from the government in 2008.
Lockheed, on the other hand, did win a TD contract from the government, and Scott Greene, vice president of ground vehicles at Lockheed Martin's Missiles and Fire Control business, has gone into the EMD phase stating: "We've had a consistent team since day one, and this win highlights the merits of a stable, proven design. Two JLTVs have been produced on an active manufacturing line, so we are already well prepared for rapid production and testing." But this strength could turn into a weakness if Lockheed gets complacent in its win and fails to keep up with the other company's innovations.
AM General, along with General Dynamics, won a TD contract in 2008 and has more than 20 years of experience building, upgrading, and armoring the Humvee. However, AM General was awarded an EMD contract based on the JLTV concept it built without General Dynamics, so it's in the same boat as Oshkosh when it comes to proving itself.
Last, although General Dynamics, BAE Systems/Northrop Grumman, and Navistar didn't win EMD contracts, they have 30 days to notify the government that they're still going to submit versions of their JLTV -- they just have to develop it with their own money.
With $13 billion-plus at stake, having gone through the first few phases of development, and a major contract -- and subsequent stock boost -- on the line, don't be surprised if they do.
Keep your eyes peeled
Right now, it's still too early to predict a winner. But you can bet I'll be monitoring this situation closely, and I will be updating as I get more information.
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