The U.S. Military Just Doubled Its Purchases of Tomahawk Missiles. Here's Why

Now this is interesting.

As China ratchets up tensions in the South and East China Seas, and Russia goes from sponsoring aircraft-shooting-down separatists in Ukraine, to -- apparently -- instructing its own military to begin artillery shelling of its neighbor, the United States Congress has just announced it is doubling its order for new Tomahawk cruise missiles from Raytheon (NYSE: RTN  ) .


Raytheon's Tomahawk cruise missile is one of the Navy's most popular weapons systems. Photo: Raytheon.

Last week, Britain's defense ministry confirmed that it has ordered 65 new Tomahawks for its Navy. Meanwhile, here in the U.S., military news website DoDBuzz.com reports that the new fiscal year 2015 defense bill is sailing through Congress, loaded with $82 million in additional spending allocated to nearly double purchases of Tomahawk cruise missiles in the coming fiscal year. Previously, the Pentagon had been expected to receive 100 of these missiles. Now, the number is rocketing to 196.

To date, Raytheon says it has delivered more than 3,000 of the most advanced Tomahawk variant, the "Block IV," to the U.S. Navy. Launched from a U.S. warship at sea, the highly accurate, GPS-enabled precision weapon is capable of striking targets as far as 1,000 miles away -- and has been used 2,300 times in combat over its history. The weapon's long range gives the U.S. Navy an extraordinary ability to affect events around the globe, even if its actual ships are nowhere near the theater of operations.

And this begs the question: Why does the Navy suddenly think it's going to need twice as many Tomahawks as it previously planned to purchase? Is the Navy planning to actually use these weapons somewhere soon?

Maybe yes, but probably no
So far as we know, no, the plan is not to actually use these Tomahawks in combat any time soon. Rather, what's happening here is simply that Congress and the Navy are looking down the road, and noticing that Raytheon's Block IV Tomahawks are rapidly approaching the target date for recertification.

Raytheon began producing the Block IV line of Tomahawks in 2004. These missiles have a projected "shelf life" of 30 years. But at the halfway mark in their lifespan, they must undergo recertification to ensure they'll still work as designed if they do eventually need to be used. For the oldest Block IV Tomahawks, that halfway mark arrives in 2019.

Preparatory to this recertification effort, the Pentagon plans to suspend Tomahawk purchases in 2016 for a period of three years. (Once production resumes, it will be with new upgrades to the missile that improve Tomahawk's "lethality, guidance and ability to find and destroy moving targets," according to a Raytheon spokesman. To ensure that the Navy has enough missiles to meet its needs during the anticipated production downtime, therefore, Congress is authorizing additional funds to stock up.

What it means to investors
So in a nutshell: Don't expect any immediate "shock and awe" show of Tomahawks raining from the skies. But investors can still expect the Tomahawk program to "make it rain" for defense contractor Raytheon. Here's why.

The extra $82 million earmarked for additional Tomahawk purchases in 2015 is just the beginning. Maybe Raytheon won't be selling many new Tomahawks over the period from 2016 to 2019, while busy recertifying the missiles it's already produced and sold. But what Raytheon will be doing is booking hundreds of millions of dollars worth of revenue from upgrading the missiles it's already built.

Already, Congress plans to add $150 million in funding to install a new navigation and communications suite in Raytheon's Tomahawks as part of the recertification process. And Raytheon will get even more funds for recertification work on top of that.

A 2005 Pentagon contract, for example, shows that in a recent round of recertifications for Tomahawks, the Navy paid $29.3 million to recertify 150 All-Up-Round Tomahawk missiles. A 2008 contract for the recertification of 165 more AUR Tomahawks cost the Navy $33.9 million. In 2010 -- $33.5 million to recertify 148 Tomahawks, plus ancillary work.

All of this suggests that recertification of the Navy's entire Tomahawk arsenal, could be a project worth as much as $600 million to Raytheon -- and with the company earning 12.6% profit margins on these revenues, that's big news for Raytheon.

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The Tomahawk cruise missile: Even after it's been sold, it still makes money for Raytheon. Photo: Raytheon.


 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 26, 2014, at 11:16 AM, RHO1953 wrote:

    82 million? As if that is significant! We spend more than that each and every day on the illegals pouring into the country. A couple of hundred Tomahawk missiles are a drop in the bucket of what is going to be needed when the inevitable WWIII starts up.

  • Report this Comment On July 26, 2014, at 11:30 AM, peterwolf wrote:

    Good !! That's the LEAST we should be doing !! What we really should be doing is immediately reversing all the Obama defense budget cuts and engage in a 'full court press' in modernizing our armed forces. That's what Russia and China have been doing for the last 10 years while we've been gutting our military to beef up the food stamp budgets.

  • Report this Comment On July 26, 2014, at 11:59 AM, djconklin wrote:

    @peterwolf, we wouldn't have to spend money on food stamps if the upper 1% hadn't shipped our jobs overseas--and where did they ship them? China!

  • Report this Comment On July 26, 2014, at 6:17 PM, fistsofshame wrote:

    Eh, no, the 1% or any other percent did not send any jobs overseas... economic policies and taxation, take care of that well enough without any conscious action from the populace. Also, the military strategic reports show that there is no justification for dramatic increases in the conventional military forces... regardless of the China and Russia improvements, because small conventional armies can be leveraged against much greater numbers with mobility, strategic location, and unconventional forces along with diplomatic actions.

  • Report this Comment On July 26, 2014, at 9:41 PM, tamborista wrote:

    Jobs went overseas largely because tax breaks were given to the 1% instead of where those breaks should have gone, to corporations. Some "fools" believed that tax breaks to the 1% would "trickle down". Nope.

    The good news is that this can still be reversed. Big tax cuts to corporations and the lost tax revenue largely made up by treating capital gains as regular income. The bad news is that both parties would oppose it, as they are each against one leg here.

  • Report this Comment On July 26, 2014, at 10:31 PM, duudaa wrote:

    If Red China was a problem then we wouldn't have most favored trade status with them. So that is bogus. More likely someone got some kick backs under the table to make a bunch of missiles.

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