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Lockheed Martin Takes Another Crack at the Submarine Market

By Rich Smith – Jul 23, 2016 at 10:13AM

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The world's biggest military aerospace company has a strange fascination with warships.

Tiny submarines could be big business for Lockheed Martin -- and General Dynamics, too. Image source: Getty Images.

Lockheed Martin's (LMT 0.08%) drone Remote Multi-Mission Vehicle (RMMV) submarine is an epic failure. But don't worry, Lockheed investors. The company has another submarine system up its sleeve -- and this one could be worth millions.

Or tens of millions.

Oh, let's just come right out and say it: $166 million.

Lose some, win some

Earlier this year, Lockheed Martin received news that after 15 years of trying to get its RMMV to work right, the Navy is about ready to throw in the towel. Plagued by multiple breakdowns that jeopardize its ability to successfully track down and tag underwater mines, the $700 million contract is going up for a recompete, and it may soon be taken away from Lockheed Martin and handed to a rival (General Dynamics (GD 0.19%) being the most likely substitute).

At the same time, however, Lockheed Martin scored a success with one of its other submarine programs last week when the U.S. Special Operations Command (SOCOM) awarded Lockheed a $166 million contract to build non-drone mini-submarines for its operators. This latter contract isn't as big as the RMMV program, but it's still pretty important.

Special subs for special forces

The contract in question calls for Lockheed Martin to design, develop, and test -- then produce and maintain -- a fleet of "dry combat submersible systems" for SOCOM. In English, that means underwater mini-submarines that can deploy secretly from a surface mothership and carry special forces troops to land on hostile shores, remaining underwater and unseen the entire way.

Lockheed is being given 66 months to complete the work. But in fact, it's probably a long way toward success on this contract already. Three years ago, if you recall, we noted that the company had won a $10 million contract to lease to SOCOM "a commercially classed dry submersible vessel known as S301i." SOCOM has been using S301i ever since to evaluate the use of the vehicle and whether it would suit SOCOM's purposes.

Now it appears they've decided it does -- and they've increased the contract value by 16 times. (Don't get too excited, though. Lockheed Martin's operating profit margin in this tangential business is only 7.9%, making it about one-quarter less profitable than the revenues Lockheed gets from building fighter jets.)

Turn-about is fair play

What's also interesting about this contract is that it may come at the expense of General Dynamics -- the very company that may benefit from Lockheed losing control of the RMMV contract. Two years ago, not long after Lockheed leased S301i to SOCOM for evaluation, General Dynamics received a $44 million SOCOM contract of its own -- also to develop a dry submersible sub dubbed "UOES 3."

Whether SOCOM intends to build and buy both mini-subs simultaneously, supporting the two manufacturers so that they can compete against each other on price is unknown (although it sounds like smart shopping). For now, all we can say for sure is that Lockheed Martin isn't out of the submarine race entirely yet -- and its ongoing effort to diversify its revenues away from "just building fighter jets" is...ongoing.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 284 out of more than 75,000 rated members.

The Motley Fool has no position in any of the stocks mentioned. 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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