America needs a new top (helicopter) model.
First flown in 1975, our fleet of Boeing (NYSE: BA ) Apache attack helicopters is "pushing 40," and beginning to show its age. United Technologies' (NYSE: UTX ) Sikorsky Black Hawks are no spring chickens either. Having been around since 1974, they passed the 40-year mark just this year.
Indeed, according to National Defense Magazine, "the helicopter designs used by the various military branches are at least 30 to 50 years old." Rounding out the list of America's most popular combat helicopters, NDM notes that Boeing's CH-47 Chinook and Textron's (NYSE: TXT ) UH-1 "Huey" helo both date from the early 1960s.
The upshot: Many models are expected to reach the end of their operational lives in the 2030-2040 time frame -- but fear not. The U.S. Army has a plan to upgrade the fleet... for a reported $100 billion price tag.
The Army has a plan
The Army's plan, dubbed "Future Vertical Lift," calls for the introduction of as many as four new helicopter models over the next 20-odd years. These will all be designated "Joint Multi-Role" (JMR) helicopters, and will include:
- A "light" scout helicopter to replace the Textron's OH-58D Kiowa Warrior
- A medium helo, in attack and utility versions, to replace the Apache and Black Hawk, respectively
- A heavy lift helicopter to replace Boeing's Chinook
- And a new "ultra" helo that, according to the Army, will be so huge in size that it can substitute for missions that currently only Lockheed Martin's (NYSE: LMT ) fixed-wing C-130 transport plane can perform
In true Army fashion, they've decided to start this process in the middle -- with the medium JMR.
Introducing the Apache and Black Hawk replacement
Last week, the Army announced it has picked two teams to design demo versions of helicopters that might fit the bill for its planned medium JMR helicopter. Boeing and United Technologies' Sikorsky will team up to build one prototype, and Textron will fly solo on the other.
Boeing and Sikorsky are calling their version the SB>1 "Defiant," and say it will feature counter-rotating rigid main rotor blades for lift, boosted by a "pusher propeller" at the rear to increase the aircraft's ability to accelerate and decelerate, thus increasing both airspeed and maneuverability. The Boeing-Sikorsky team expects to have a prototype ready for first flight by 2017, and it should look a little bit like this:
Textron, meanwhile, is doubling down on the popular V-22 Osprey design (currently built in collaboration with Boeing), to field a next-generation tiltrotor aircraft that Textron calls the "V-280 Valor." Textron says the Valor will offer the Army "unmatched speed, range and payload, operational agility, and low speed maneuverability." Here's a first look at it:
Who will win?
United Technologies and Boeing build, respectively, the No. 1 and No. 4 best-selling helicopters in the world -- the Black Hawk transport and the Apache attack helicopter. They're both strong contenders to win the Army's new FVL helicopter contract, and are made stronger by their alliance. The companies boast that their "Defiant will fly faster and farther than any current medium-lift helicopter today and also carry a heavier payload."
What does it mean to investors?
With an anticipated servicewide need for as many as 4,000 medium-class FVL helicopters, and a projected price tag of $100 billion to buy them all, the Future Vertical Lift project is a really big deal for these defense contractors. But as investors, which one should we want to win?
Let's look at a few numbers.
Textron earns 12.7% profit margins on its Bell business. Bell is also Textron's single biggest revenue generator, and absolutely crucial to the success of the company as a whole.
By way of contrast, S&P Capital IQ data show that United Technologies only earns about 9.5% pre-tax profits from its Sikorsky helicopter division -- and Sikorsky is United Technologies' smallest revenue generator. (It may also be for sale). Similarly, Boeing earns only a 9.2% operating profit margin from its military aircraft division -- which is three times smaller than Boeing's commercial aircraft business.
So the way I look at it, a win on Future Vertical Lift is worth more to Textron than it would be to either Boeing or Sikorsky. What's more, since Textron is better at squeezing profits out of its helicopter business than are its two rivals, a win by Textron would benefit Textron shareholders more than a win for Boeing or United Technologies would help their respective investors.
Long story short: This early in the game, it's hard to say who will build the Army's next top helicopter model, and collect the $100 billion prize at the end. But there's no doubt which stock offers the most potential to reward shareholders.
That's Textron by a mile.
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