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

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...
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Read/Post Comments (29) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2014, at 3:45 PM, gjsuhr wrote:

    "So filling up each Paladin magazine with Excaliburs works out to 39 x 975 x...... = 28,275

    Are there really that many targets out there worth $70,000 to destroy?

  • Report this Comment On June 30, 2014, at 4:29 PM, altizar wrote:

    They might sell them for 70,000, but I sure bet they probably only cost 1,000 to make them . . .

  • Report this Comment On June 30, 2014, at 6:05 PM, Richard233 wrote:

    Seems to me, there is still a time and a place for both. Some times you have a very specific target, other times you need to saturate an area because your targets are spread out.

    Additionally, a near miss to a soft target is a lot different than one to a hard target. These would be good to use against a tank, but not against the enemy in fox holes.

    And we are going to have to make sure that they can't disrupt the GPS signals while we are at it. Don't forget, that's how they got the older drone to land in Iran, by spoofing the signals.

  • Report this Comment On June 30, 2014, at 6:07 PM, TMFDitty wrote:
  • Report this Comment On June 30, 2014, at 6:20 PM, tommy1954 wrote:

    boy sound like military industrial complex is the way to invest and the price of life just when down another 2.40,hey that guy just stole still my box of toothpicks,that ok we'll get him.

  • Report this Comment On June 30, 2014, at 6:38 PM, bell1571 wrote:

    OMG, and to think of all those hours, days, weeks, months. and years I spent training Forward Observers )FO's), to put steel on target in 3 rounds or less. Tsk, tsk, my military career is now obsolete. St. Barbara will be rolling over in her grave. Indeed, this is a sad day......

  • Report this Comment On June 30, 2014, at 6:59 PM, ticleve2 wrote:

    Now if we can get the enemy to put an apple on their heads we'll have it made.

  • Report this Comment On June 30, 2014, at 7:10 PM, ilsm50 wrote:

    US Artillery is the queen of the battlefield, there are not that many targets that far away from the troops to justify the several hundred million bucks in development costs for a high tech artillery "round", while the Apache Longbow is more popular it is a big, very expensive and vulnerabe helicopter that the 155mm tube cannot replace.

    The $70,000 per round is based on production lots of 600 rounds each, the past two years' production buys. Were the lots to rise to 15000 per year the price would be well less than $25000 per round.

    While the rules are no US troops with 150 yards of a target.

    There are also a lot of issues with the reliability of the round it accelerates at 18000g's out f the tube.

    Like all guided rounds there are a lot of things that targets can do like move. While having an observer 40 kilometers away is problematics.

    Imagine Excalibur putting F-35 out of business, or Reaper!

  • Report this Comment On June 30, 2014, at 7:24 PM, stockingshorts wrote:

    Now I would bet that DARPA has a plan to engineer a guided munition with a Tactical Nuke if they haven't already........

  • Report this Comment On June 30, 2014, at 7:32 PM, TMFDitty wrote:

    @ilsm50: The next generation of Excalibur, which I believe is designated "Increment II" is supposed to be capable of adjusting to track and kill moving targets.

  • Report this Comment On June 30, 2014, at 7:41 PM, trc wrote:

    On the modern battlefield the term is "shoot & scoot". Counter battery radar can detect projectiles in flight and track them back to their source. So you fire a quick 5 rounds, then get the hell out of Dodge, before return fire obliterates your position. Also artillery is not the precision weapon that any competent commander would use against moving hard targets, Its main purpose both historically and in present use is against multiple/area soft targets. If you want to destroy multiple, moving hard targets i.e. tanks, use TOW missiles, A-10s or Apaches not $70,000 a pop artillery rounds that require a GPS fix.

    There was once a science fiction story about two nations at war. One had a gee whiz industrial complex that kept promising bigger and better bangs for the buck. The other side just kept producing the same old weapons in large and larger quantity's. Guess which side won?

  • Report this Comment On June 30, 2014, at 7:52 PM, gAg wrote:

    Spend $70,000 on a round that will kill 10 terrorists, or let the 10 terrorists injure soldiers each with a life insurance up to $400,000. Hmmmm I'd say it is worth it.

  • Report this Comment On June 30, 2014, at 8:02 PM, mottthefool wrote:

    I'll pass on the Raytheon Kool aide.

    Paladins are old rust buckets. The 777 is the only 155 weapon of recent manufacture. For the 777 the ATK PGK is the way to go.

  • Report this Comment On June 30, 2014, at 8:29 PM, ilsm50 wrote:

    aGa,

    I would use a fac nuke and take out 100,000 a whack.

    The flash to bang time for a 155mm "flight" is in the order of minutes.

    Why spend $70,000 to kill 10 terrists, if you could get the group to stay in the 5 meter CEP, and the round don't fail enroute?

    US tried attriting by the body court in Vietnam, did not work, regardless of the unit cost per count.

    Shaky benefit cost analysis!

  • Report this Comment On June 30, 2014, at 10:26 PM, luckyagain wrote:

    US arm development: WOW!!!

    US arm cost: unaffordable.

    Result: US too broke to fight a war.

  • Report this Comment On June 30, 2014, at 11:46 PM, quasimodo007 wrote:

    Expensive shell to use in battle.

    the USA make weapons and Jets /Ships and Tanks that need more protection then to use it in battles /War

    I bet the EVIL russian and Warmonger Israeli have a Cheaper and better shell.

  • Report this Comment On July 01, 2014, at 12:53 AM, Darksail wrote:

    How does the electronics survive the shock of launch? If they can then go back to using the BIG GUN that was made for Sadam Hussein for war that was originally designed to launch satellites for Canada. It could launch certain payloads into space such as fuel, oxygen, mechanical parts etc. Then use a space tug to gather it all up and build America's permanent space station. It would cost far less to fire it into space then launch it. Bet it would bring down the cost by 95%. I wish I could remember the original designer but the Mossad killed him.

  • Report this Comment On July 01, 2014, at 1:02 AM, Darksail wrote:

    I worked on the TOW 2B and if you can hit a target at 30 miles, guided by a satellite, you will own the battlefield. No operators near by, no soldiers in danger against multi million dollar targets, I want my army to have tons of them. With guidance from space, you could use it as an assignation weapon. Wouldn't want to be a battlefield general with big flags on his jeep.

  • Report this Comment On July 01, 2014, at 1:36 AM, Darksail wrote:

    You guys really don't know the cost savings of tech. There was a bridge in N Vietnam that stood many bombing attempts by the USAF, at an unbelievable cost of planes, men and weapons and one new smart bomb took it out.

    If you look up the human cost of war between Vietnam and Iraq, the new tech saved a ton of lives. The insurgency is where we really paid the price with dead and wounded. Different kind of war.

    $70,000 a shot and only one shot needed, this is a bargain.

  • Report this Comment On July 01, 2014, at 3:17 AM, Mattee1909 wrote:

    Now once you produce them you either have to use them or sell them? We could have them stored under Congress to make them feel safe.

  • Report this Comment On July 01, 2014, at 4:26 AM, daverhall wrote:

    It would depend on what kind of battlefield conditions are found and what the overall mission is. It is nice to have a variety of armament to work with, but there has got to be some common sense to determining our needs and the costs. It will be still be depending on how much bribery is used and for how long. Congress has a very big appitite for contributions and retirement.

  • Report this Comment On July 01, 2014, at 6:21 AM, runninggun1024 wrote:

    Police in TENNESSEE cant wait to get one there getting tired of using shotguns and small military weapons to kill people with.my opinion

  • Report this Comment On July 01, 2014, at 10:12 AM, rrats0966 wrote:

    So at the worst. it cost 50K to destroy a target with dumb weapons and at best 10K, The cost of each on these new shells is 70K. Do the math, I don't see this as a bargain!

  • Report this Comment On July 01, 2014, at 10:55 AM, Darksail wrote:

    For the CFOs out there let us try the math again. A tank enters the battlefield and threatens our soldiers. The tank costs about $4 million a piece.

    The tank crew adds to that cost. Our soldiers are 3000 meters away and happen to have an American made TOW missile which costs $180,000. The aim and fire the TOW and destroy the $4 million dollar tank. Now the problem is they are only 3000 meters away and everyone knows they are there. Our soldiers who survive the enemy response will end at up at the VA. Cost unknown. The alternative is $70,000 to destroy the $4 million dollar tank at 30 miles and our soldiers are safe and no VA. Sometimes you have to think like a CEO.

  • Report this Comment On July 01, 2014, at 11:15 AM, dubujul wrote:

    I really don't want to know about our own weapons because chinese and Russians are eagerly waiting for our science creators to steal them from us and beat us at the game, even in a war where we won't use these weapons and they do.

  • Report this Comment On July 01, 2014, at 11:19 AM, TMFDitty wrote:

    @rrats0966: That's a fair question. But you saw the part about the supply chain savings, right? Also consider trc's "shoot and scoot" comment. If a Paladin has to sit still, firing 10 to 50 times before it hits a target, are the bad guys just going to sit there without shooting back?

    The cost of having to sit around, firing multiple times before finally nailing the target may include the cost of buying a new Paladin.

  • Report this Comment On July 01, 2014, at 2:42 PM, PsiKick wrote:

    With a 2 meter accuracy and you aimed at the Apple, you would hit anywhere from his feet to a miss 6 feet over his head.

  • Report this Comment On July 02, 2014, at 2:56 AM, RetiredGI wrote:

    Give it a few months and the Chinese will have all the diagrams and specifications on this weapons systems. And the A/holes that wrote the above article share the responsibility for publishing classified information.

  • Report this Comment On July 02, 2014, at 7:28 AM, jhershey45 wrote:

    There is one significant issue with this article, it was written by someone with no apparent military experience. The Army would never load its Paladins exclusively with Excalibur rounds, probably not even one per vehicle. They would reserve them for special missions. Unfortunately on the battlefield the enemy moves, at time very rapidly. Most of the time that enemy happens to be infantry (or terrorists) in the open. Why use two or three 70k rounds when 10 or 15 1k rounds would be just as effective? Unfortunately this is how most news articles are written, from the perspective of someone who has no concept of the subject. It would be like having a journalist writing an article on NASCAR or for that matter nearly any other subject.

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