General Dynamics (NYSE:GD) landed a huge arms contract in August when Saudi Arabia requested permission to purchase $1.15 billion worth of M1 Abrams main battle tanks for its army. At least, the contract looked huge at the time. Now, it looks positively tiny...
Because General Dynamics just scored a second tank contract last week that's 50% bigger.
We want to tank you for your business!
Once again, General Dynamics is benefiting from turbulence in the Middle East.
As we learned earlier this week from an official U.S. Defense Security Cooperation Agency notification to Congress, the government of Kuwait has asked Congress to approve the sale of a "recapitalization" package for 218 of its M1A2 main battle tanks. According to DSCA, this recapitalization will include the sale of 240 .50-caliber M2A1 machine guns and 480 7.62 mm M240 machine guns to install on the tanks, plus upgraded armor and engines, new 120 mm cannon tubes and remotely operated weapons stations, and assorted radios, night vision goggles, infrared sights, and other hardware.
In total, the recapitalization, which is essentially a rebuilding and upgrading of the entire tank fleet, will be worth $1.7 billion in revenue to principle contractor General Dynamics, which builds the M1. Other companies named as principal contractors include American contractors Raytheon, Northrop Grumman, Lockheed Martin, and Honeywell, and also Norwegian defense giant Kongsberg.
What it means to investors
When you take the $1.15 billion Saudi tank deal from August, the $668 million Stryker sale that General Dynamics just scored in Peru, and now the massive $1.7 billion win in Kuwait, General Dynamics has put together more than $3.5 billion in armored vehicle contracts in less than half a year.
This amounts to nothing less than a lifeline for General Dynamics, which only a couple of years ago was facing the imminent threat of having to close down its Lima, Ohio, tank-building factory due to a lack of new orders. Recently clocked at a production rate of just 10 tanks per month, Lima now has enough work to keep it busy for years -- building and upgrading not just Abrams main battle tanks, but Strykers as well. (The Stryker, originally built in London, Ontario, by General Dynamics Land Systems-Canada, had some of its production shifted to Lima to help take up underutilized capacity at the tank plant.)
From a dollars-and-cents perspective, the news is just as good for General Dynamics investors. According to data from S&P Global Market Intelligence, General Dynamics earns about a 15.6% operating profit margin on armored vehicles such as the Abrams and Stryker. The $3.5 billion in sales represented by General Dynamics' three new contracts thus promises to produce profits to the tune of $550 million for General Dynamics -- nearly $1.80 per share. Even for a company that earned more than $9 per share in profits last year, this is obviously a big deal.
And remember: All of this is before General Dynamics even begins executing on the even bigger foreign arms deal it inked back in 2014, to sell Saudi Arabia $13 billion worth of light armored vehicles (LAVs). According to Canada's The Globe and Mail, General Dynamics is still just gearing up to begin delivering on that contract. But Canada has begun issuing export permits for the vehicles, and shipments should begin any day now.
Once it does, the profits are really going to start flowing for General Dynamics.
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. 345 out of more than 75,000 rated members. Follow him on Facebook for the latest in defense news.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.