The U.S. Navy loves its Arleigh Burke-class destroyers.

Also known as the DDG 51-class, after the hull number on the lead ship of the class, the Arleigh Burke-class has changed a lot since its eponymous vessel first slid into the sea. Since that first ship launched in 1989, the class has undergone several evolutions, known successively as Flight I, Flight II, and Flight IIA -- 64 active destroyers in all. With each Flight, the Arleigh Burke-class has gotten a bit longer, a bit heavier, and a bit better equipped than the one preceding it.

The upcoming Flight III will be the largest class of DDG 51s ever built, both in size and in quantity. Current plans call for at least 33 Flight III destroyers to be built, at the rate of roughly two per year, and each one will displace 9,800 tons -- about 18% bigger than the original Flight I Arleigh Burke.

They'll also be outfitted with a much more advanced sensor system -- thanks to Raytheon (NYSE:RTN).

Infographic showing ships on which AMDR could be installed.

Raytheon thinks its new AMDR system is kind of a big deal. Image source: Raytheon.

All systems go for Flight III

General Dynamics won the contract to build the first Flight III destroyer (USS Harvey C. Barnum, Jr. (DDG 124)) last year. (Future newbuilds will probably be split evenly between General Dynamics and its archrival, Huntington Ingalls.) Like the warships that preceded it, the Navy's newest destroyer will boast a Vertical Launching System for anti-aircraft and Tomahawk missiles, an advanced anti-submarine warfare system, two Sikorsky Seahawk helicopters, and the famous AEGIS combat system, which is why this class of warship is sometimes referred to as an "AEGIS destroyer."

The new Flight III will also feature one brand-new piece of equipment: a new and improved air and missile defense radar (AMDR) system.

Introducing the AMDR destroyer

It's been a few years, so now's a good time to review what AMDR means to the Navy -- and to Raytheon.

As recently as 2013, three companies were vying to build a successor to the Lockheed Martin-built AN/SPY-1(V) radar system that powered previous versions of AEGIS: Lockheed Martin itself, and challengers Northrop Grumman and Raytheon. Raytheon won that competition with its new AN/SPY-6(V) S-band radar system.

This new AMDR will boast twice the range of Lockheed's preceding SPY-1 radar, spotting targets "half the size at twice the distance of today's radar." Raytheon also says it will offer "higher reliability and sustainability, and lower total ownership cost."

Speaking of cost...

Back when Raytheon won the AMDR contract in 2013, I valued that win at $1.6 billion across the American destroyer fleet. Raytheon received the first installment on that anticipated payday earlier this month, when the Pentagon announced the award of a $327.1 million contract to Raytheon, to begin low-rate initial production of the first three AMDR systems. (Production of this installment should be complete by October 2020.)

Future systems, one would imagine, will subsequently roll out at approximately the rate at which destroyers are produced, i.e., about a couple of units per year, thus adding about $200 million or thereabouts to Raytheon's annual revenue stream.

Now admittedly, $200 million isn't a huge sum for a company like Raytheon, which booked more than $24 billion in revenue last year. But here's the thing: Raytheon designed AMDR as a scalable radar system.

Assembled from 2-cubic-foot "boxes" called radar modular assemblies (RMAs), AMDR can be scaled up by adding more boxes, creating more radar "oomph" for large warships such as destroyers (or aircraft carriers). Put nine RMAs together, and AMDR offers capability equivalent to Lockheed's AN/SPY-1(V) radar currently in service aboard U.S. Navy destroyers. Install 37 RMA boxes and the radar's range doubles. 69 RMAs increase range to four times existing capabilities, and so on, with greater ranges but diminishing returns.

But AMDR can also be scaled down in size for installation aboard smaller amphibious warfare vessels, frigates, and even the Littoral Combat Ship. That simple fact expands Raytheon's addressable market for AMDR far beyond just the size of the Navy's destroyer fleet -- potentially, to the size of the fleet itself. In theory at least, every Navy warship could one day be an AMDR warship, and with a larger installed base to absorb the radar's development costs, Raytheon should be able to lower prices as well, increasing AMDR's cost advantage over competing systems and growing the market even more.

So while Raytheon's AMDR business began with a contract win in 2013, and kicked into action with an order for three radar systems this month, don't expect it to end there. For Raytheon, this could be just the beginning of a brand-new -- and profitable -- franchise.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.