Please ensure Javascript is enabled for purposes of website accessibility

The Pentagon Doles Out Contracts to 5 Potential Warship Builders

By Rich Smith – Mar 15, 2018 at 6:32AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Navy wants a frigate. First, it must choose a frigate builder.

Late last year, the U.S. Navy issued its official request for proposals from defense contractors interested in building a new frigate-class warship. Early this year, we found out which five companies have responded to the Navy's call.

On Feb. 16, the Pentagon announced it is awarding $15 million firm-fixed-price contracts "for Guided Missile Frigate (FFG(X)) conceptual design" to each of the following five companies:

  • General Dynamics (GD -1.05%), prime contractor on the original Independence-class Littoral Combat Ship (LCS) design for the Navy.
  • Austal USA (AUTLY), General Dynamics' Australian partner on the LCS project, which has since taken over the prime position for Independence-class LCS construction.
  • Lockheed Martin (LMT -0.90%), prime contractor on Freedom-class LCS warships.
  • Fincantieri Marinette Marine Corp, Lockheed Martin's Italian partner on same.
  • And Huntington Ingalls Industries (HII -0.82%), prime contractor on the U.S. Coast Guard's National Security Cutter (NSC).
Warships sailing in a line

Military shipbuilders are lining up to bid (and build) America's new frigate fleet. Image source: Getty Images.

Each contractor is instructed to work up "conceptual designs" for the warships it will propose as the Navy's new guided missile frigate (FFG) for the 21st century, aiming to "reduce cost, schedule, and performance risk" on the warship -- if and when it is contracted to prepare a "detail design" and actually build it. There's no guarantee that any one of the firms will actually win such a contract, but the rewards for winning would be great.

The Navy hopes to buy as many as 20 frigates for its fleet, and is targeting a cost of no more than $950 million per warship. That puts the total value of this contract at something on the order of $19 billion.

Who's bidding what?

What will the Navy get for its money? Retired Navy Capt. Jerry Hendrix laid out the offerings in a recent column in National Review:

  • General Dynamics, although it's already a well-established military shipbuilder in its own right, is taking a somewhat strange route in this competition, entering in partnership with Spain's Navantia. Together, these firms will bid a variant of Navantia's expensive F100 frigate, currently in service with the Spanish Armada.
  • Austal will chart an independent course with a cheaper, upgraded version of its Independence-class LCS warship.
  • Lockheed Martin, unsurprisingly, will stick with its own LCS variant as well, the Freedom. This design has already won interest from Saudi Arabia to serve in that country's navy in the form of a tweaked multi-mission surface combatant  (albeit at a cost higher than the U.S. Navy might be willing to pay).
  • Fincantieri will bid its own FREMM-class frigate design, currently in service with the Italian and French navies.
  • Finally, Huntington Ingalls will bid a more powerfully armed variant of its National Security Cutter (NSC), and could be a strong contender. Hendrix ballparks the hull cost of a plain-vanilla NSC at $700 million, well below the Navy's targeted price range. Even assuming that a more militarized version of an NSC costs a bit more, this could give Huntington an edge over its competition if picking a winner comes down to price.

Laying odds

As I say, if price is any sort of an object, Huntington Ingalls should have a fair shot at winning this contract (although Hendrix does have some concerns about the ships' suitability for a contested, wartime environment). At the other end of the scale, General Dynamics may have torpedoed its chances by partnering with Navantia to offer the Navy a warship priced at closer to $1.2 billion -- well in excess of what the Navy wants to spend.

Austal and Lockheed, meanwhile, fall in the middle of the pack. Their existing LCS designs sell for about $666 million each, according to the U.S. Government Accountability Office. With the upgraded guns needed to fit the Navy's frigate criteria, it's still reasonable to assume that Austal and Lockheed can hit the $950 million sweet spot for unit cost. Their biggest drawbacks: The Navy's dissatisfaction with the twin LCS designs is arguably the primary reason the Navy is abandoning the LCS, and asking shipbuilders to design a frigate in the first place.

Which brings us to Fincantieri and its FREMM frigate. Hendrix believes FREMM could sell for as little as $800 million, and argues that "its spacious design, combat capabilities, and cost" make FREMM "a clear front-runner."

The upshot for investors

Until we know more about precisely what improvements on existing designs the contractors will offer, and the ultimate cost, it will remain difficult to pick a winner on this contract. Here's one thing we do know for sure, though:

There's $19 billion at stake here. According to data from S&P Global Market Intelligence, only two of the contractors named above (General Dynamics and Lockheed Martin) do more than $19 billion in annual revenue. If any one of the other contenders wins -- Austal or Fincantieri, Huntington Ingalls or Navantia) -- this could literally transform its business, and transform the lucky company (for the duration of the contract, at least) into a leading global military shipbuilder.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
$386.29 (-0.90%) $-3.50
General Dynamics Corporation Stock Quote
General Dynamics Corporation
$212.17 (-1.05%) $-2.26
Huntington Ingalls Industries, Inc. Stock Quote
Huntington Ingalls Industries, Inc.
$221.50 (-0.82%) $-1.83
Austal Limited Stock Quote
Austal Limited

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.