The U.S. Pentagon is obsessed with hypersonic missiles (and for good reason).

China declared its first hypersonic missile "operational" in 2019, and demonstrated its use in that country's recent pressure campaign against Taiwan. This "DF-17" missile is said to be capable of reaching speeds 10x the speed of sound (Mach 10). Russia has actually used hypersonics in combat at least once, striking a target in Ukraine with a Kh-47M2 Kinzhal hypersonic missile in August, and has reportedly deployed two other hypersonic variants. 

And now America is in a race to catch up, and looking to its defense contractors to help.

Artist's conception of Raytheon's new hypersonic attack cruise missile.

Image source: Raytheon Technologies.

Lockheed takes the lead

In total, the Pentagon has asked the U.S. Congress to fund hypersonics research to the tune of $4.7 billion in fiscal 2023 (with billions more to be spent on production later on). Up till now, Lockheed Martin (LMT -0.23%) seemed to be leading this race, winning for example a $928 million contract to develop a ground-launched hypersonic conventional strike weapon (HCSW) and a $480 million contract to develop an air-launched, rapid-response weapon (ARRW), both in 2018. 

In total, the Department of Defense is said to have as many as eight separate hypersonic weapon systems in development, with the Defense Advanced Research Projects Agency (DARPA) spearheading the effort. Still, as recently as 2018, the Air Force noted that "no other contractor has this level of design maturity" that Lockheed was demonstrating in its weapons. 

But times, they are a-changing.

Rivals arise

Just last week, Lockheed rival Raytheon Technologies (RTX -0.99%) took the lead on its competitor, winning a $985 million award to develop and demonstrate the Air Force's newest weapon system, the air-launched hypersonic attack cruise missile (HACM). As Bloomberg reported, not only Lockheed, but Boeing (BA -0.31%) also had bid on this contract, submitting preliminary designs for the missile -- but only Raytheon triumphed. 

As Raytheon tells it, it -- not Lockheed -- is "now at the forefront of hypersonic weapon and air-breathing technology development." Raytheon's HACM will be an "air-launched, scramjet-powered hypersonic weapon," capable of reaching at least Mach 5 speeds and being delivered by fighter jet. Raytheon will be developing the missile in cooperation with partner Northrop Grumman (NOC -0.38%) -- which will provide the scramjet engines -- and also with the Australian military, giving Raytheon an immediate second market to sell into. 

How much is the contract worth?

With the HACM contract in hand, Raytheon shareholders can count on their company receiving nearly $1 billion in revenue through March 2027 (the deadline for completion) for the development work alone. For a company that did more than $64 billion in revenue last year, according to data from S&P Global Market Intelligence, that's actually not a lot -- about $200 million per year. What's more, development work will entail significant research and development costs -- which implies these revenues will not bring high profit margins. Assuming Raytheon's successful, though, next will come weapons sales, and the higher-margin revenue those bring. 

There's not a lot of detail about the cost of hypersonic weapon systems at present. The technology is too new. That being said, according to the Government Accountability Office, Lockheed's ARRW project is estimated to cost $1.4 billion for just the first eight missiles -- about $180 million apiece, although most of that price will be for development -- which may give us a ballpark figure for Raytheon's own sales price. 

In future years, Heritage Foundation senior defense fellow John Venable says the cost per hypersonic missile might drop to $100 million, $50 million, or even $10 million over time. That's still significantly more than the $1.4 million cost of a Raytheon Tomahawk missile, for example, albeit for significantly enhanced capability. (The Tomahawk flies at less than Mach 1 and has a shorter range.) Granted, if Tomahawks end up getting replaced by HACMs, then Raytheon may lose revenues from the outgoing system. The trick will be making up that revenue by selling lots of units of the new weapon at their presumed higher price. 

So how much money could we be talking about? When compared to the Tomahawk, for example -- well, the U.S. Navy alone has some 4,000 Tomahawks in inventory. Even a conservative guess at Raytheon selling HACM's for 10x the price of a Tomahawk (so $14 million per unit), but selling 10x fewer of them than it has sold Tomahawks (so 400 HACMs), suggests HACM could easily become a $5.6 billion weapons program for Raytheon -- more, if Raytheon either sells more HACMs, or sells them for a higher price, or both. 

Even for a company with annual revenue of $64 billion, that sounds like a pretty big deal.