It's been more than 2,300 years since the nation of Greece was last considered a military powerhouse -- around about the time Alexander the Great was burning down Persepolis.
Today, the country's air forces lean heavily on aging F-16 fighter jets first flown in the 1970s, and even more sclerotic F-4 Phantom jets that date back to 1960, flying alongside similarly Vietnam-war era UH-1 "Huey" helicopters. But Greece's military is about to get an upgrade.
As the U.S. Defense Security Cooperation Agency -- the Pentagon arm responsible for coordinating foreign military sales contracts -- advised Congress last month, the U.S. State Department has just cleared a Greek request to buy a whole fleet of new UH-60 Black Hawk helicopters from Lockheed Martin (LMT 1.03%).
Assuming Congress approves the sale, Lockheed Martin stands to reap nearly $2 billion in revenue ($1.95 billion to be precise) from this deal. So what does this all mean for shareholders? Let's find out.
NYSE: LMT
Key Data Points
What Greece is buying, and why
In this initial deal, Greece intends to purchase 35 Black Hawks from Lockheed, along with 80 engines to power them (two per helicopter, plus 10 spares), and a whole list of ancillary equipment (radar, radios, and other electronics, machine guns, rocket launchers, and ammunition, for example). Thus, multiple defense contractors are likely to share in the revenue from this deal -- but as primary contractor, all the money will run through Lockheed Martin.
Greece intends to use the new helicopters to replace the Hellenic Army's current multi-role helicopter fleet, which, according to data from FlightGlobal's 2024 World Air Forces report, leans heavily on 63 UH-1H Huey helicopters built by Textron's (TXT +0.14%) Bell Helicopter unit.
What it means for Lockheed and Textron
And that number may be instructive. Can 35 Black Hawks actually do the work of nearly twice as many Hueys? Perhaps, if the new Black Hawks are easier to maintain and require fewer repairs than the older Hueys they replace. But also perhaps not.
As it turns out, an October report from online news site FlightGlobal noted that Greece initially intended to purchase 49 Black Hawks from Lockheed. If it turns out that this remains Greece's intention, and the initial 35-helo purchase is just a first installment on Greece's shopping list, this deal could actually turn out to be about 40% bigger than it seems -- implying Lockheed Martin might get another $780 million in revenue out of it, growing the size of this deal to $2.7 billion.
What would that mean for Lockheed Martin? Rotary and mission systems, the Lockheed unit that owns Sikorsky and builds the Black Hawk, is currently the company's second-biggest revenue producer at $18.1 billion collected in 2022 (the most recent full year for which we have data). Rotary is the company's second to last most profitable segment, however, generating operating profit margins of only 9.2%, according to data from S&P Global Market Intelligence, a bit below the 10.5% operating profit margin for Lockheed Martin as a whole.
Thus, even at the upper end of its estimated value, this deal will only add about $250 million in incremental profits for Lockheed Martin, or about 3% of Lockheed's total annual take -- and this amount will probably be spread over a period of years. Thus, even at $2.7 billion, this deal isn't going to be enough to move the needle on Lockheed Martin stock, which still seems pricey to me at nearly 17 times earnings, and 1.7 times annual sales.
(As a general rule, I prefer to buy defense stocks at a price-to-sales ratio of 1 or less.)
A better stock to buy
Curiously, defense investors might actually be better off taking a look at Textron, the company whose helicopters are being replaced (in Greece at least) by Lockheed's helicopters.
Seemingly priced similarly to Lockheed stock at 17 times trailing earnings, Textron's price-to-sales ratio of 1.2 seems closer to fair value. Analysts polled by S&P also anticipate that Textron will grow earnings faster than Lockheed over the next five years, at a rate approaching 12%, versus Lockheed Martin's growth rate of 7%.
While neither stock is a clear-cut buy for me at current prices, I suspect Textron stock is still closer to bargain territory than is Lockheed. Investors looking for a defense stock to own in 2024 should keep an eye on Textron.
