The average cost of an Iranian-built Shahed-136 kamikaze drone is $50,000. A Standard Missile-2 surface-to-air missile, used by U.S. Navy destroyers for missile and anti-drone defense, meanwhile, costs $2.1 million -- 42 times as much.

It doesn't take an advanced degree in mathematics to realize the economics of war here favors the party launching drones over the one buying missiles to shoot them down. And yet, the Navy doesn't have much choice but to use $2 million missiles against $50,000 drones when they appear. The alternative is letting the drones reach their target, and having to repair or replace a $2.5 billion destroyer, and explaining to the families of more than 300 sailors that they were just trying to save money!

Still, in an ideal world, the U.S. military would prefer to shoot down cheap drones with even cheaper rockets -- and two of our biggest defense contractors, L3Harris (LHX 1.58%) and BAE Systems (BAES.Y 0.55%), may have just figured out how to do that... with a little help from Ukraine.

The VAMPIRE missile system mounted to the bed of a Toyota pickup.

The VAMPIRE missile system mounts to the bed of a Toyota pickup. Image source: L3Harris.

Vampires versus drones

In a report last week, the X social media account OSINTtechnical published video of a Ukrainian surface-to-air missile team using L3Harris' Vehicle-Agnostic Modular Palletized ISR Rocket Equipment (VAMPIRE) launcher, which includes thermal sensors, to shoot down a Russian Shahed drone with an advanced precision kill weapons system (APKWS) rocket manufactured by BAE Systems.

APKWS is a laser-guided kit that attaches to a basic unguided Hydra 70 rocket, the most commonly used rocket in the U.S. military, cheaply converting the latter into a guided missile. How cheaply? Well, one recent Navy contract paid BAE to supply more than 10,000 APKWS rockets at an average cost of just $22,000 each.

The economics of missile (and drone) defense

At that price, the Navy could shoot down Shaheds for a fraction of the drones' cost. Granted, L3's Vampire system adds to the cost. Each Vampire costs $2.85 million. But this launcher is reusable. The total Vampire-plus-APKWS cost would reach parity with the cost of a Shahed after just 100 missiles launched. And a Vampire-plus-APKWS combination would be cheaper than a Standard Missile after just two launches.

Long story short, assuming it's possible to replicate the Ukrainians' success in using Vampires and APKWS missiles to shoot down cheap drones, the U.S. military may have just discovered the holy grail of missile and drone defense: shooting down missiles and drones for less than it costs an enemy to produce them.

Indeed, replicating the success may have been one aim of providing these weapons to Ukraine in the first place. As DefenseNews.com has reported, the VAMPIRE systems were originally ordered under a U.S. Navy contract that predated Russia's invasion of Ukraine. While the system was still undergoing testing in the U.S., 14 VAMPIRES were then diverted to Ukraine in 2023.

And now they've proven effective in an active combat environment -- and not just against drones. Media reports earlier this year showed a ship-mounted VAMPIRE shooting down a Russian cruise missile at sea.

Is L3Harris stock or BAE Systems stock the better play here?

So is it time for investors to try to invest in this solution? Maybe, but also maybe not.

First and foremost, it's important for investors to remember we're dealing with the U.S. Pentagon here. Just because it's found a solution, doesn't mean it will implement it, or do so in a timely fashion. For years, the Navy has talked up low-cost lasers and railguns as solutions to its drone-and-missile problems, only to slow-roll the one and cancel the other. VAMPIRE could meet a similar fate.

Nor am I particularly excited about the valuations on the stocks involved in this solution. At 2 times annual sales, and 27 times earnings BAE Systems is hardly a bargain-priced defense stock. L3Harris stock at 1.9 times sales and 25 times earnings isn't much cheaper.

Of the two, L3Harris looks slightly less overpriced, though. It also boasts the better dividend yield (2.2%) and a faster projected long-term earnings growth rate of 12%. If (hope against hope) it turns out the Navy does begin buying these defensive weapons for its ships in large numbers, L3Harris will be the more likely value candidate.