The U.S. military has a reputation as a somewhat secretive organization. But in at least one respect, the Pentagon is one of the most "open" organizations on the planet.
Take the U.S. Navy's new superweapon, the electromagnetic railgun, for example (pictured above). Capable of lobbing projectiles at speeds in excess of Mach 7 -- 5,000 mph -- to destroy targets as much as 110 miles distant. Rear Adm. Bryant Fuller, the Navy's chief engineer, calls the EM railgun "an incredible new offensive capability for the U.S. Navy."
It's the kind of project you'd expect to be labeled "top secret..."
But instead, the Navy's outlining its progress every step of the way -- and in public, where investors can watch.
Sometime before the end of 2016, the Navy says it will conduct sea trials on a working prototype EM railgun aboard one of its new Joint High Speed Vehicles. Before that happens, though, the Navy is detailing the award of new contracts to develop the weapons system, and naming names on who will build it.
Over the past few days, the Pentagon has announced that two of these companies -- BAE, which built one of the Navy's two prototype railguns (General Atomics built the other), and Raytheon, an expert in "smartening up" unguided cannon rounds -- are now hard at work ramping up the power available to operate the railgun.
BAE was originally awarded a modest, $11.6 million railgun contract back in December 2011. It's now getting a fourfold boost in funding as the Navy awards it a $43.2 million follow-on contract to continue R&D work on the railgun's "Integrated Power Systems power load modules" through December 2016.
Raytheon, which got its first railgun power load module contract (worth $10.1 million) in October 2011, is getting nearly as big an increase in funding. Its $33.2 million contract "modification," announced last month, is likewise expected to run through the end of 2016.
What it means to investors
With fiscal 2013 sales of $27.9 billion, and $23.7 billion respectively (according to S&P Capital IQ figures), even these multimillion-dollar railgun contracts represent mere drops in the revenue bucket for BAE and Raytheon. Long-term investors, though, should focus on what these contracts could mean for the companies in the future.
The U.S. Navy sank $240 million into R&D on its railgun through "Phase I" of the project. Now in the middle of Phase II, the Navy expects to spend another quarter-billion dollars to "advance the technology for transition to an acquisition program." So already, we're looking at a $500 million weapons program -- before a single combat-ready railgun has been purchased.
Going forward, investors will want to keep an eye out for additional development contracts at BAE and Raytheon, preparatory to the 2016 test date. So far, we haven't heard of any major hitches in the railgun's development. So assuming things continue moving ahead smoothly, we'll want to next look for contracts to develop and upgrade the $25,000-per-projectile ammunition that will form the literal "shooting end" of this new weapons system.
My guess is that Raytheon's work on developing the incredibly accurate, long-range Excalibur cannon ammunition for the Army gives this defense contractor a leg up on winning railgun ammunition contracts.
One final, possible player in ammunition contracts would be Northrop Grumman (NYSE: NOC ) , which is currently assisting DARPA in developing a new technology for equipping "dumb" munitions with internal chips for guidance to their target -- "Chip-Scale Combinatorial Atomic Navigators," or C-SCAN. Key to Northrop's involvement would be C-SCAN's ability to survive a high velocity, Mach 7 discharge, which is not yet proven. But if it works as billed, C-SCAN could enable Navy railguns to hit targets more than a hundred miles away, and without any need to rely on jammable GPS transmissions to find their target.
Northrop's work for DARPA is starting out at a low dollar value of just $648,000. But like BAE's and Raytheon's work on the Navy's new railgun, it's a project with real, transformative potential. And thanks to the Pentagon's penchant for detailing its progress in press releases, investors can follow the money every step of the way.
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