The U.S. Navy's new Zumwalt-class destroyer is a marvel of engineering. Bigger than any destroyer currently in the fleet -- bigger even than our Ticonderoga-class cruisers -- USS Zumwalt was built with angled features that give it a stealth profile. On enemy radar screens, it appears no larger than a fishing boat (and is correspondingly harder to locate and target). Zumwalt packs aboard as many as 80 land-attack, anti-ship, and anti-aircraft missiles, but perhaps its most remarkable weapons are its twin 155-mm Advanced Guns System (AGS) cannons (the two snow-covered bumps in the image above).
Initially designed to fire Long Range Land-Attack Projectiles (LRLAP) manufactured by Lockheed Martin, Zumwalt was stripped of its main offensive weapon last month when the Pentagon called a halt to purchases of LRLAPs, citing their sky-high cost. But this left the Navy with a dilemma. It couldn't afford the $1 million-a-shot cost of firing LRLAPs -- well and good. But without something to shoot, the ship's AGS would be useless.
Enter Raytheon's Excalibur-guided munition. Last week, the Navy revealed plans to buy Raytheon's Excalibur rounds to replace Lockheed Martin's LRLAPs, requesting funds for the former (but not the latter) in its fiscal year 2018 budget submission to the Pentagon.
Designed to strike targets 30 miles away, Excalibur lacks the range for which LRLAPs were designed (60 miles). Still, Excalibur is uber-accurate, able to land shells within two meters of its target when fired from a Paladin self-propelled gun (for which it was designed). What's more, each round costs "only" $70,000 at current production rates. While that's not exactly "cheap," it is still 15 times cheap-er than Lockheed was selling LRLAP for.
(Note: Some sources indicate Excalibur will cost much more than $70,000 -- but I believe this is mistaken. $70,000 was the unit cost the U.S. Army was paying two years ago, and these costs tend to come down over time with increasing volume. One factor that could add cost, however, is the need to modify the Zumwalt class's AGS to accommodate the smaller Excalibur round -- a modification estimated to cost $250 million across three ships).
What it means to Raytheon
From an investor's perspective, the Navy's decision to switch from LRLAP is more a feather in Raytheon's cap than coin in Raytheon's purse. Here's why:
Each Zumwalt-class destroyer is expected to carry upward of 1,000 rounds in its magazine. Times three warships, times $70,000 per Excalibur round, that works out to a potential revenue opportunity of $210 million to "fill up" a Zumwalt. That sounds like a lot, but the Army actually uses a lot more Excaliburs than the Navy ever will. Equipping all of the Army's 975 Paladin self-propelled guns with a full load of Excaliburs would require 38,000 rounds of ammunition -- an addressable market 13 times as large as the Navy's Zumwalt fleet.
Additionally, Excalibur can be fired from American M198 and M777 howitzers, from Germany's Panzerhaubitze 2000 and the U.K.'s AS-90 self-propelled guns, and Sweden's Archer Artillery System. When you consider how many "platforms" can use Excalibur in Western armies, the addition of the Zumwalt platform in America's navy is relatively insignificant. That said, it does give Raytheon an entry into an entirely new market -- naval artillery -- to which Excalibur had not been previously exposed, and that fact is not entirely insignificant.
Consider: The more tubes Excalibur gets stuffed into, the better its chances of becoming the standard smart munition for all 155 mm-size weapons employed by Western militaries, and not just in these nations' armies, but now their navies as well. And the more places Excalibur is used, and the more rounds of it are produced for use, the greater Raytheon's economies of scale producing it -- lowering Raytheon's cost of production, raising its profit margins, and at the same time making the munition more attractive to buyers.
Zumwalt is just one part of this process, true. But every little bit helps.
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. 346 out of more than 75,000 rated members.
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.
More from The Motley Fool
Trump to Launch "Buy American" Campaign in Support of U.S. Defense Contractors
The Administration reportedly wants to put U.S. military attaches and diplomats to work as a sales force for defense contractors.
Pentagon Admits Trump Bump Won't Happen in 2019, Promises 2020 'Masterpiece'
Investors betting on a surge in defense spending are in for a long wait.
Better Buy: Raytheon (RTN) vs. General Dynamics (GD)
Which defense contractor is the smarter choice?