Russia Growls, Poland Raises Its Shield, and Raytheon Is Poised to Profit

Raytheon could win a $43 billion missile defense deal from Poland.

Jul 1, 2014 at 9:45AM

It's official. Poland is building a missile shield.

Standard
Raytheon's missiles set the "standard" for modern air defense. Photo: Raytheon.

Irked by the U.S. announcement that it would scuttle the final phase of building a Europe-wide missile defense system, Poland announced earlier this year that it would forge ahead with a $43.3 billion plan to build an air-defense system covering only the nation. Capable of shooting down hostile aircraft, drones, cruise missiles, and tactical ballistic missiles, the "Polish Shield" project will take years to develop. But when it's finished, it should give Poland a strong defense against the kind of Russian aggression that is currently tearing Ukraine apart.

It could also prove a huge boon to investors in Raytheon (NYSE:RTN).

The details
As recently as March, four players were believed to be in the running to build the Polish Shield: Raytheon, its sometimes-partner-sometimes-rival Lockheed Martin (NYSE:LMT), Israel (which has acquired technical expertise in missile defense through development of its Iron Dome shield), and French defense conglomerate Thales.

This morning, however, Reuters reported that Poland has issued a "shortlist" cutting the field of contenders in half. Israel and Lockheed Martin are out. But Thales and Raytheon are still in the running.

Reuters puts the initial value of this contract at $5 billion, which makes sense. After all, according to the CIA, the entire value of Poland's annual defense budget barely surpasses $9.8 billion. The country can hardly finance this project all in one blow, even if it were to propose a multiyear contract. The Polish Shield will be years in the making.

What it means to you
Even so, this is a very big opportunity for Raytheon. America's premier missile maker and the company responsible for the popular Patriot air defense system, Raytheon's missile systems unit (which would likely build interceptor rockets for Polish Shield) is the company's single biggest driver of revenue ($6.6 billion last year). Its integrated defense systems unit (which would build the Polish Shield system per se, if Raytheon wins the contract) is both the company's second-biggest revenue producer and its most profitable business by far. IDS produced $1.1 billion in operating profits for Raytheon last year, an astounding 17.2% operating profit margin on the division's $6.5 billion in revenue.

So how much profit might we expect Raytheon to earn on a $43 billion Polish Shield contract? Oh, about $7.4 billion or so -- nearly as much profit as Raytheon earned over the past four years combined, and all from a single contract win.

Foolish takeaway
Mind you, this contract is not yet Raytheon's for the taking. While the company appears to have knocked out two of its four rivals, there's still Thales to contend with. According to S&P Capital IQ figures, Thales operates on pretty thin margins, earning just 7% operating profit from its defense business -- so Thales can be expected to fight hard, and bid aggressively for this business.

By the same token, though, the fact that Raytheon is so good and so profitable in missile defense means it can bid just as aggressively. What's more, because Raytheon's profit margins in this business are so fat, it's got a lot more room to maneuver, and underbid Thales if it needs to, to win the work.

While not a lock to win, I have to say that Raytheon's chances are looking pretty darn good.

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.

Standard
Raytheon's chances of winning the "Polish Shield" contract just rose a little bit higher. Photo: Wikimedia Commons.


 

Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers