Psst! Want to Own a Piece of Israel's Iron Dome?

Over the course of a single harrowing week, between Nov. 14 and Nov. 21, 2012, military forces under the control of Hamas in Gaza lobbed more than 1,500 missiles at Israel. Two-thirds of these missiles, launched into areas with little or no population, were ignored.

As for the remaining 500 or so missiles that did pose a threat to population centers, Israel unleashed a new missile defense system on them called "Iron Dome." It destroyed 85%  of the missiles it targeted.

To put this in perspective, during the 1991 Gulf War, the U.S. deployed batteries of Patriot missile defense systems to Israel to shoot down Iraqi Scuds. The Patriot's manufacturer, Raytheon (NYSE: RTN  ) claims Patriot succeeded in hitting 40%  of the Scuds it targeted. (Our own Government Accountability Office puts the figure for "overall effectiveness" at closer to 9%.) Depending on which number you believe, therefore, it appears that Israel's new system is anywhere from twice to 10 times as effective as the Patriot systems of 20 years ago.

How do we get a piece of that?
The implications are obvious. For now, Patriot is still selling well. Raytheon, which is now making Patriots in cooperation with Lockheed Martin (NYSE: LMT  ) , just landed a deal to sell an upgraded version of the system to Turkey. But Israel has a literal "killer app" in Iron Dome. When it comes to missile defense, it's clearly best of breed -- and squarely in the sights of U.S. defense contractors, who'd love to be able to sell it to their customers.

They may get the chance.

Israel's RAFAEL developed Iron Dome's radar, battle management system, communications, and interceptor missile. But RAFAEL didn't do it all on its own. In fact, over the four years it took to develop the system, the U.S. spent nearly $900 million  to help develop the weapons system. Most recently, it provided $205 million in funding to help Israel spool up a fifth Iron Dome battery, just in time for it to be put into action during the Gaza action.

Considering how well this investment is paying off, the U.S. Congress  recently moved to "ensure the United States has appropriate rights to this technology." In exchange for a commitment to help Israel build and pay for additional Iron Dome batteries, Congress convinced RAFAEL to take on Raytheon as its U.S. partner, to assist with marketing Iron Dome in the U.S. 

And it gets better. As part of the same agreement that gave Raytheon an "in" on Iron Dome, the company also got to team up with RAFAEL on the Israeli company's latest anti-missile project, called "David's Sling ," an even more robust system designed to target medium-range missiles launched from farther away than Iron Dome can tackle.

Good, better, best
Iron Dome was designed to target rockets and other missiles launched from under 45 miles away. David's Sling targets objects as far out as 200 miles. And RAFAEL also has an even longer-range deterrent called the "Arrow" system (manufactured in cooperation  with Boeing (NYSE: BA  ) ), which aims to protect Israel from ballistic missiles originating in Iran.

Longer term, multiple defense companies are working on the holy grail of missile defense, a laser-based system, that will obviate the need to try and "hit a bullet with another bullet." (Lockheed, Boeing (NYSE: BA  ) , and Northrop Grumman (NYSE: NOC  )  each have laser-based systems in the works.) But for now, the Israeli products appear to be the best ones out there for missile-on-missile defense.

What's it mean to you?
Among publicly traded companies, Raytheon, as the U.S. defense contactor most closely tied to RAFAEL and its highest-profile missile defense system, has the pole position to profit from this Israeli technology. Conveniently, Raytheon is also one of the cheapest defense stocks out there today.

With few analysts expecting it to post fast-pace growth in the near future (long-term growth estimates hover around 8%), Raytheon carries a most enticing P/E ratio of less than 10. Adding to the stock's attraction, Raytheon boasts a dividend yield of 3.5%. And with only 31% of its profits earmarked for dividends, the dividend looks about as safe as can reasonably be expected in a fiscal-cliff environment.

Rounding out the list of financial metrics, free cash flow at the firm is strong -- about 98.9% of reported net income -- and debt levels are low, at less than $1 billion, net of cash on hand.

In sum, with strong value characteristics and a popular product to sell, Raytheon looks like a fine defensive play for your investing dollars. Maybe not "rock solid," but definitely "iron strong."


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  • Report this Comment On December 03, 2012, at 11:20 PM, Balabu wrote:

    Using the Iron dome missile defence system against short-range missiles is a fool’s game for the following reasons:

    a. Short range missiles can be fired from a honeycomb firing in about a dozen missiles in short order. The iron dome might intercept one or two but the rest will hit the target.

    b. Intercepting a missile that cost few hundred dollars by iron dome defence missile that cost over 100000 dollars will quickly bankrupt the defenders.

    So what to do against short range missiles? That does not belong to investment theme but my response is to do what nations always have done when their civilian population was attacked and it is retaliating as hard as possible. Respond with 5 missiles for each shot at them. The attacked civilian population can take only so much before they flee resulting in surrender and doom.

  • Report this Comment On December 04, 2012, at 12:10 AM, thegreywolfe wrote:

    Babalu, that would be fine for any country BUT Israel. First of all, Israel is in the unique position that any time it tries to defend itself, the UN and the rest of the world immediately demand that it cease and desist.

    Second, retaliation such as you suggest causes civilian casualties, which will leave Israel open, as it has in the past, to accusations of war crimes and crimes against humanity.

    However, there are certain factors you seem to ignore:

    1) Rockets don't come from Gaza out of honeycomb batteries. Most firings are single-rocket launches. The 15 or so seconds it takes to fire off a honeycomb is enough to guarantee counterbattery fire that wipes out the firing point entirely (and the people firing it).

    2) Even when fired out of a honeycomb, the dispersal rate of these rockets at extreme range can be a radius counted in kilometers, so even if they're all aimed at the same target, there's no guarantee that all (or, indeed, any of them) of them will arrive at the point they were aimed at.

    3) Estimates say that 10% or more malfunction and land within one or two kilometers of the firing point.

    4) While the missiles themselves aren't expensive, smuggling them in from Iran certainly is-- often 300% or more than the initial price of the rocket itself.

    Also, take into account the moral effect on the enemy firing off such rockets, knowing that IF he's lucky, only a few per cent of his firings will actually get through to harm anyone. To date, the "success" rate has been the firing of several hundred rockets to kill opne Israeli citizen. Think of the effect, both financial and moral, in Hamas et al knowing that it would take thousands of attempted missile strikes to kill one single "enemy" civilian.

    There are many factors taken into account in war-- it's not always simply a question of turning your enemy's land into a barren parking lot. Iron Dome was developed to answer a specific need-- the need for Israel to defend itself while avoiding accusations of war crimes and crimes against humanity for killing civilians. In this case, it worked far better than anyone expected.

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