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.

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.

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.

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