Please ensure Javascript is enabled for purposes of website accessibility

5 Massive Defense Deals You Have Might Missed in Last Week's Pentagon Contracts Update

By Rich Smith - Oct 6, 2019 at 9:13AM

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

Billions of dollars of defense contracts went out the door last week. Don't let this news get lost in the shuffle.

The end of a fiscal quarter in Washington is a funny time -- and the end of a fiscal year at the Pentagon even more so.

As the clock starts ticking down to the final days of a quarter, the Pentagon's contracts clerks shift into overdrive, finalizing and pushing out the door dozens of defense contract announcements daily until the new quarter begins. And so it was that on Friday, September 27, the penultimate workday of the fiscal year, the U.S. Department of Defense announced 115 separate contracts in a single day

(To put that in context, last Thursday, DoD announced a grand total of four contracts.)

With so many contracts to sort through, it's almost a given that some of the news might get lost in the shuffle. So here are a few thoughts about five of the contracts announced last week that investors may have missed.

U.S. Pentagon building

Image source: Getty Images.

$2.6 billion for Boeing

The single biggest contract awarded last week went to aerospace giant Boeing (BA -0.67%) -- $2.63 billion to deliver to the U.S. Air Force 15 KC-46 refueling aircraft and various ancillary equipment.

On the one hand, this is a nice win for Boeing. $2.63 billion is more than 11% of the revenue that the company's defense unit collects in an average year, according to data from S&P Global Market Intelligence. On the other hand, Boeing never expected to earn much profit on these planes -- at least not on the initial sale (fatter margins may come farther down the road, from servicing and upgrading the planes). Indeed, at last report Boeing was still selling them at a loss. 

Still, with rumors still rumbling that Airbus might push for the Pentagon to rebid the contract, time is of the essence, and the more planes Boeing can sell to the Air Force now, the less risk it bears of losing further business down the road.

$1.4 billion for Northrop Grumman

The day's second-biggest contract was only half as big as what Boeing got, with Boeing's aerospace rival Northrop Grumman (NOC -0.60%) netting $1.39 billion for work on Embedded GPS Inertial Navigation System Modernization.

Profitability won't be a concern on this one, as Northrop's mission systems division, which will run the contract, earns a beefy 12.8% operating profit margin on its products. One thing for investors to keep in mind, though: Whereas Boeing's contract anticipates delivery of the 15 KC-46s by March 2023, Northrop's GPS work will stretch through September 2032 -- meaning that despite the big headline number, this contract will actually end up contributing only about $100 million or so to Northrop's $30 billion in annual revenue.

A billion more for Fluor

Shifting gears from Air Force contracts to the Navy, engineering giant Fluor (FLR 3.23%) scored a big win last week when the USN exercised an option to have Fluor support Naval Nuclear Propulsion work at the Naval Nuclear Laboratory in Pittsburgh in fiscal 2020.

This contract will provide "technology and ... technical support" to the Navy's nuclear-powered submarines and aircraft carriers, and provide $1.07 billion in new revenue to Fluor's most profitable division (government services). For a company that saw its revenue plummet 16% last quarter, this should be a welcome development -- but with a caveat.

Just days before the contract was awarded, Fluor announced plans to sell off "select ... government and equipment businesses." Until we get more detail on Fluor's plans, it will be hard to know if this extra $1 billion in government largesse will be going to Fluor, or to whomever it ends up selling off its government services division to.

Not one of the usual suspects

Airplanes, satellite GPS, nuclear-powered warships -- so far we've stayed in well-marked "defense" department territory. But the Defense Department is a massive, globe-spanning enterprise, and not all defense contracts are so obviously military in nature.

As it turns out then, the fourth-largest contract the Pentagon awarded last Friday went not to a defense company at all, but to electric utility Hawaiian Electric (HE -0.05%), recipient of a $638.5 million "regulated tariff-based contract" for the "ownership, operation and maintenance of the electric distribution system on the Island of Oahu, Hawaii."

Now, don't get too excited. This contract will run through March 27, 2072, which averages out to less than $13 million a year (and thus represents less than half a percentage point of the utility's $2.9 billion in annual revenue). Still, Hawaiian Electric bested four other bidders to win this award, so for the next 50 years it will own the franchise to provide electric power to the U.S. Army base on Oahu.

And finally ...

$255 million for a company you've probably never heard of before

I want to give honorable mention to a contract won by one company that isn't a publicly traded defense stock at all (or at least not yet). Friday saw privately held Vigor Marine LLC win $254.6 million to help "modernize" two of America's aging guided missile cruisers, the USS Chosin (CG 65) and USS Cape St. George (CG 71).

This is somewhat unusual, inasmuch as Vigor didn't build either of these ships -- Huntington Ingalls did, while Vigor is primarily a commercial shipyard doing construction and repair of civilian vessels. But I applaud the Navy's decision to spread the wealth around a bit, as it helps to support and diversify the pool of contractors qualified to work on these large surface combatants, somewhat reversing a trend toward mergers and acquisitions steadily concentrating the defense business among fewer and fewer major players.

As the Pentagon seeks to control costs and tap new companies with new ideas to contribute to cutting edge solutions such as robotic warships, Vigor Marine seems to be evolving into a major player in defense contracting. I think it's a company well worth watching going forward -- even if it isn't public just yet.

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

The Boeing Company Stock Quote
The Boeing Company
$167.88 (-0.67%) $-1.14
Fluor Corporation Stock Quote
Fluor Corporation
$26.53 (3.23%) $0.83
Hawaiian Electric Industries, Inc. Stock Quote
Hawaiian Electric Industries, Inc.
$42.29 (-0.05%) $0.02
Northrop Grumman Corporation Stock Quote
Northrop Grumman Corporation
$470.31 (-0.60%) $-2.83

*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 08/11/2022.

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.