Raytheon Has a $70,000 Magic Bullet That'll Knock Your Socks Off

The latest version of Raytheon's Excalibur projectile is unimaginably accurate -- and could be unimaginatively profitable for Raytheon.

Jun 30, 2014 at 1:07PM

Smart bombs. Laser-guided missiles. Actual laser guns.

The weapons that America's defense contractors churn out often seem like the stuff of science fiction. The platforms that deploy them, too, sound unfailingly high-tech: "fifth-generation" fighter jets, "drone" aircraft, and "stealth" warships. But did you know that one of the military-industrial complex's most important inventions comes out of the barrel of a howitzer?

"Caution: Excalibur at work." Photo: Wikimedia Commons.

King Arthur, eat your heart out
It's called the "Excalibur," and it's a 155-millimeter howitzer round that creator Raytheon (NYSE:RTN) says can target an object 30 miles away and consistently hit within two meters of that target. To put that in perspective, say you set up a Paladin self-propelled howitzer in San Jose, Calif., and stood William Tell's son somewhere in the suburbs of San Francisco with an apple on his head. Say you then told the Paladin to hit the apple with an Excalibur round. Excalibur might miss the apple -- but nine times out of 10, it'll nail the younger Tell somewhere between socks and eyebrows.

In fact, Excalibur is usually even more accurate than that. In a test firing last year, several Excalibur rounds fired at a distance of 30 miles landed within one meter of their targets, on average. (It achieves this extraordinary range by gliding on wings at the apex of its firing arc, while the extraordinary accuracy comes via GPS guidance.)


Raytheon's Excalibur. Illustration: Wikimedia Commons.

Excalibur and the Paladin
Now, you'll notice that this article specifically cited Excalibur rounds fired from a Paladin self-propelled howitzer. This was not unintentional. BAE Systems' (NASDAQOTH:BAESY) (LSE:BA) M109A6 Paladin is key to the argument for why Excalibur is important to Raytheon. 

Raytheon, in partnership with BAE, designed Excalibur to be fired from the Paladin (among other weapons systems). The Paladin's ammunition magazine holds 39 rounds. And at last report, the U.S. Army and National Guard had bought a total of 975 Paladins for their arsenals.

Judging from recent contract announcements by the Pentagon, the Army is paying about $70,000 per Paladin round. So filling up each Paladin magazine with Excaliburs works out to 39 x 975 x 70,000, which equals a $2.66 billion revenue opportunity for Raytheon. (And the opportunity could be even bigger. This is because in addition to the Paladin, Excalibur can also be fired from 155mm guns including the American M198 and M777 howitzers, Germany's Panzerhaubitze 2000, the U.K.'s AS-90, and Sweden's Archer Artillery System. So the sales potential for this munition could be multiple times $2.66 billion.)

What's so great about Excalibur?
But for now let's focus just on the potential of the Paladin. Excalibur is an extraordinarily accurate and long-ranged weapon. That's certainly one argument in its favor. But it costs $70,000 a pop -- a good deal for Raytheon, but a less obvious argument in favor of the Army buying it. Here's why the math works, regardless:

Paladins today ordinarily carry 39 unguided howitzer rounds, which are produced by arms makers including General Dynamics (NYSE:GD) and Esterline (NYSE:ESL) and cost about $1,000 each. But because such rounds are "dumb," Army experts estimate it can take anywhere from 10 to 50 unguided rounds to destroy a target that Excalibur can take out in a single shot. So on average, a Paladin firing unguided rounds might have to nearly empty its magazine to destroy a target that -- if armed with Excaliburs -- it could destroy with just one shot.

Replacing dumb rounds with Excaliburs would hurt revenues at General Dynamics and Esterline. But it should permit a Paladin to destroy targets faster and destroy more targets, and to cause less collateral damage in the process. And because the Paladin won't go through its ammunition as quickly, the Army won't need to load, ship, unload, and reload as much ammunition -- saving vast amounts of money up and down the supply chain.

When you consider the efficiencies Excalibur permits on the supply chain "tail," the Army may very well end up saving money by buying Excaliburs -- even at 70 times the cost of a conventional howitzer round.

What all this means for investors
The superiority of the Excalibur over conventional howitzer rounds -- in range, in accuracy, in efficiency of operation of the Paladin, and in cost to transport -- will make this product incredibly attractive to the military. Even at $70,000 a pop, the Pentagon is going to buy a lot of them. Indeed, they're already buying a lot of them.

In recent months, we've highlighted two big purchases of Excaliburs -- one in August last year, for 765 rounds, and a second just last week, for 757 more. Each one of these purchases was for more rounds than all the Excaliburs fired in anger... ever. It's easy to see how the humble howitzer could become a multibillion-dollar business for Raytheon. And even on a business as big as Raytheon's ($23.3 billion in sales last year), it's going to be big enough move the needle.

Raytheon stock is down today. But don't be surprised when it starts moving back up.

And one more thing...
Did we mention that Raytheon pays its shareholders a generous 2.5% dividend? The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics and Raytheon Company. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information