Uncle Sam Wants YOU (to Build a Better Boat)

The new RFP is here! The new RFP is here!

It's the moment we've been waiting for, defense investors. This week, the Pentagon issued its final request for proposals on one of the biggest defense projects to come down the pike in ... well, awhile. Not the KC-X deal -- no, Boeing (NYSE: BA  ) and Northrop Grumman (NYSE: NOC  ) are still cooling their heels in the Pentagon waiting room, waiting for the news to come down on that one.

This time, we're talking 'bout the Littoral Combat Ship.

LCS me ASAP
If you haven't heard about the Navy's newest close-to-shore toy, then let me bring you up to speed  -- and speed really is key with this ship. The competing variants built by Lockheed Martin (NYSE: LMT  ) and General Dynamics (NYSE: GD  ) do vary in some respects. Lockheed's Freedom class LCS sports a monohull design, while General D's Independence breaks new ground with a trimaran layout. The General's ship is longer and has a bigger surface area for aerial operations, while Lockheed's boasts a shallower draft suited for closer-in operations. But both of these boats are fast, fast, fast.

Each ship clocks in with a top speed of better than 40 knots -- one of the fastest clips in the modern Navy. Such roadrunner-like sprinting, combined with the vessels' shallow drafts (13.5 feet for Freedom, and just 10% deeper for Independence), makes the LCS class uniquely qualified for operations in shallow waters close to shore ("littoral" waters -- hence the name). So whether drug interdiction's your bag, or coast-guarding, or Somali pirate chasing, chances are the LCS is the ship for the job.

Price tag
Speaking of the job, though, the hourly rates for these contractors don't come cheap. Lockheed's first attempt at building the boat cost taxpayers $637 million, while General D's prototype rang in at a budget-busting $704 million. Future models are expected to cost quite a bit less, fortunately. And they'd better, because Congress has already capped the price it's willing to pay at $460 million per ship.

Still, that works out to in excess of $25 billion in total revenues for the project, as the U.S. Navy fills out its wish list for 55 of 'em.

Baby steps
As for who will claim all that loot? Well, that remains to be seen. This week's RFP asks both of the prime contractors to submit bids for a batch of 10 LCSes, additional to the two already completed. Assuming the contract is awarded on a fixed-price basis, we're probably looking at $4.6 billion or thereabouts for whoever wins this first round of the competition. That said, the Pentagon's effort to force its contractors to compete on price could well backfire down the road. Logically, whoever wins this first tranche of the project will develop economies of scale, and expertise in shipbuilding that will serve it well in future competitions.

The risk, therefore, is that even if it gets a good price on the first batch of ships this year (bids are due in late March), the Pentagon could find itself locked into a sole-source situation in years to come.

Working the odds
So who's best positioned to berth all these profits? It's hard to say.

Lockheed took an early lead in August, when in a report on test runs of the new Freedom, the Navy gushed "it's got only 21 material deficiencies!" (Which sounds bad, but is just one-tenth the usual glitch-rate.) On the other hand, word has it that General Dynamics' Independence has also performed very well in tests. And judging from Pentagon comments, if both ship designs meet its requirements, the deciding factor will most likely turn out to be ... sticker price. Whoever promises to perform the contract at the lowest price, should win.

If you're of a mind to gamble on the winner, therefore, your best bet may be to put your money on neither contender, and seek out a sure thing instead. For example, Alcoa (NYSE: AA  ) is a big provider to both programs. The Independence's hull is all-aluminum, while the Freedom sports an all-aluminum superstructure. Fifty-five "tin cans" worth of aluminum may not amount to much for a company of Alcoa's size, but it's a whole lot more than goes into 55 cans of tuna.

Or you could play the odds by buying shares of Raytheon (NYSE: RTN  ) . Although an early eliminate-ee from the prime contractor's job at LCS, odds are good that whoever winds up building the chassis on this vehicle, Raytheon's rockets will be riding up on top.

Last but not least, consider a real dark-horse candidate -- iRobot (Nasdaq: IRBT  ) . The company's got a real rule-breaker of an idea in its Seaglider autonomous underwater vehicle, a swimming robot admirably suited for mine detection and disposal. But the Seaglider doesn't swim fast, or far. What it really needs to achieve commercial success -- and beaucoup profits -- is the ability to hitch a ride to the place where the mines are floating. LCS is the answer to that problem.

Foolish takeaway
Someone's going to win LCS, but we don't know who. But whoever does win, the arrival of this new warship could be a gamechanger for iRobot.

Looking for other high-tech defense prospects for your portfolio? Check out Motley Fool Rule Breakers, where we're looking into options in everything from UAVs to missile defense, from bombproof trucks to bulletproof soldiers. 30-day free trials are available on-demand.

Fool contributor Rich Smith does not own shares of any company named above. General Dynamics is a Motley Fool Inside Value selection. iRobot is a Motley Fool Rule Breakers recommendation. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (8)

Comments from our Foolish Readers

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 January 29, 2010, at 5:49 PM, JuliusCeasure wrote:

    In an era where the prevalent party in the legislative and executive branches of our government want to spend on everything EXCEPT advancing weapons systems for our military; the only good I see coming from the LCS is jobs.

    At one time our Navy had the equivalent of the LCS ship, albeit without helicopter capability; the Pegasus class hydrofoils. These small fast ships were suitably armed for littoral combat operations but were deemed an unnecessary expense and were retired from service. In today’s environment and with political ability granted; there isn’t anything happening in littoral waters our Navy can’t handle.

    As for Somali pirates; once again, we could catch them if the proper resources were dedicated to the task. In our screwed up politically correct environment what would we do with them if we did capture them; read them their rights, bring them to the U.S. where the taxpayer would bare the burden of trial and incarceration and then tolerate there presence as “undocumented immigrants” when released? What ever happened to hanging them from the yardarms?

  • Report this Comment On January 30, 2010, at 2:37 PM, relldar wrote:

    My name is Darrell and I work at Bath Iron Works. We have been hearing that the Navy has found hundreds of welding problems in ships built in Mississippi. With hundreds of welding problems over several as many as 5 or more why are we not hearing about this in the news. Is this something that is being taking used in the consideration on who gets the next fleet of 55 ships being bid on. It has always been that Bath Iron Works as built better ships then our counter part in Mississippi. Price is one thing but repairs is quite another. Bath Iron Works has a ship now that has out lived it expections and is still working better then expected. This is something that has not happened in many years. Still questions. We are hard working familys that have given this our all and by our all meaning. I have a son as do many of us at Bath Iron Works who serve or have served on these ships and we want nothing but the very best for our children. To us this is more then a job the is our Family and your children are our family as well and we want all of our and yours to come home safely. So I hope that our President takes this in to consideration. To my understanding Bath Iron Wroks has never lost a ship in combat meaning that our children always come home safe. We know that our ships ( GO INTO HARMS WAY ) every day but that is why we built them. Thank you. Darrell Damboise

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