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