Wayward drones, rogue missiles, and hostile aircraft, beware: The U.S. Navy is getting a new laser cannon. Weighing in at perhaps 500 kilowatts in power output and bearing a $100 million-plus price tag, it will be the Navy's biggest and most powerful laser yet -- and its most expensive.
For Lockheed Martin (LMT 0.79%), it could also be very profitable.
Last week, the U.S. Navy awarded Lockheed Martin a $150 million contract to build it two prototype "High Energy Laser and Integrated Optical-dazzler with Surveillance" (HELIOS) weapons by 2020. One system will be built for testing on land, the other will be installed aboard a Flight IIA Arleigh Burke-class guided missile destroyer.
Lockheed's contract contains the option for the Navy to extend its ambit to cover a total of nine weapons. If exercised, these options could grow the value of the contract to as much as $942.8 million -- essentially turning HELIOS into a $1 billion weapons program.
Investors have been waiting for this news -- and waiting to learn who would win the HELIOS contract -- ever since the Congressional Research Service published a report in November 2017 describing the weapon's development. Initially, Lockheed will develop a 60 kW laser, then rapidly ramp up its power to first 150 kW, then 300 kW, and ultimately as much as half a megawatt of power throughput. In fact, Lockheed is probably already well on the way to reaching that goal, having already built 30 kW and 60 kW versions of its ATHENA air defense laser cannon for the Army.
Competition rises, too
Now, Lockheed isn't the only company building lasers for the military. Northrop Grumman (NOC 0.26%) won a Navy contract to build a nearly-as-big 150 kW Laser Weapon System Demonstrator (LWSD) in 2015. Raytheon (RTN) has a 25 kW laser that's small enough to mount on a Humvee. And Boeing (BA 6.45%) has built a 10 kW laser gun that's actually men-packable. (That's not a typo. It takes a team of at least eight Marines to carry and assemble the several components that go into Boeing's laser squad weapon.)
That said, most of these other lasers have garnered just a handful of millions of dollars in Pentagon funding to develop their prototypes. At $150 million -- and potentially nearly $1 billion -- Lockheed Martin's HELIOS contract is taking laser weapons to a whole new level entirely.
Indeed, the nonprofit Armed Forces Communications and Electronics Association (AFCEA) predicts that Lockheed's laser contract "will ultimately lead to the first program of record for laser energy weapons in the U.S. military." In other words, while other contracts have requisitioned the construction of one-off, prototype laser weapons for testing purposes, Lockheed's new laser will be something that the armed services will be able to buy in bulk -- and deploy in force.
How soon will we see it? Pretty darn quick, if the Navy gets its druthers. According to AFCEA, Naval Sea Systems Command (NAVSEA) says it wants to begin testing the HELIOS aboard a destroyer "in the shortest time frame possible," and the office of the Secretary of the Navy says fielding laser weapons is an "urgent" Navy and Marine Corps objective.
What it means to investors
Although Lockheed's HELIOS is still probably two years away from first deployment, I don't think it's too early for investors to begin doing the math to figure out what this might mean for Lockheed Martin. Working off the HELIOS contract's $942.8 million total potential value, and dividing by the nine weapons the Navy might decide to purchase, it works out to a unit cost of just under $105 million per laser cannon. That makes each HELIOS about as expensive as an F-35 stealth fighter jet (also, incidentally, built by Lockheed).
Unlike an F-35, though, which costs more than $65,000 an hour to operate and can carry only eight missiles, HELIOS will probably cost just about $1 per shot -- and can keep shooting forever, so long as it has a fuel source to generate energy. And not needing projectiles to shoot, it will save the Navy money on ordnance and supply chain support as well, which should result in a low lifetime cost, increasing the weapon system's attractiveness to the Navy.
What will HELIOS mean for investors in Lockheed Martin stock? At this early stage in the game, it's hard to say how profitable HELIOS will be. Even at $105 million per unit, it certainly won't become as big a part of the business as Lockheed's F-35 program, which accounts for about a quarter of the company's revenue today, anytime soon. But at a $1 billion program size, it could move the needle on Lockheed Martin's stock. And if AFCEA is right, and HELIOS becomes the first (and for a period of time only) laser weapon program of record, it could vault Lockheed Martin into a quick lead in the race to build, and sell, even more laser weapons to the military down the road.
That, in turn, could make HELIOS Lockheed Martin's most effective weapon in fending off its own laser competitors.