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?

Flickr
"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.)

Excalibur

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers