Pity the military-industrial complex.
After decades of mergers and acquisitions, many of our nation's most successful defense contractors are coming up against a problem with a capital "PR": They're so big that even their good news may not qualify as "news" anymore. For example, look at a few headlines from the defense industry earlier this week:
- Raytheon (NYSE:RTN) received a $2 million order to build Paveway II laser-guided bomb kits.
- Northrop Grumman (NYSE:NOC) got $7 million to provide "non-personal services for the Defense Intelligence Agency IT network."
Yawn. I'm sorry, but when your company starts weighing in at market caps that are multiples of $10 billion, seven-figure contracts just get no respect.
Meanwhile, L-3 (NYSE:LLL) landed a $23 million contract to design a "miniaturized CDL terminal." Whatever a CDL is, that number is at least a bit bigger relative to this $10 billion contractor. Moving down the value chain, Armor Holdings (NYSE:AH) and its $42 million contract to build medium tactical vehicle-class trucks definitely qualify as news -- in large part because the firm is just a fraction the size of the other contractors named above.
How big is big?
No, for a real heavyweight to "make news," nothing less than nine figures qualifies these days. Luckily for General Dynamics (NYSE:GD), the three contracts it announced this week fit the bill nicely. On Tuesday, the heavy-metal maker announced a $380 million contract to upgrade 180 of the Army's Abrams main battle tanks. On Thursday, Abrams rode to the rescue once more, with a pair of contracts: one a penny-ante (i.e. $20 million) order to produce thermal gunsights, and the other a major deal to rebuild (i.e. refurbish) at 350-400 Abrams "integrated management tanks." Total value of the contracts: as much as $801 million, or about 3.4% of the company's annual revenues.
Read the fine print
Good to know? Sure, but here at the Fool, we don't just report news -- we aim to teach you how to interpret it. And when dealing with defense contractors, there's one key fact you need to identify alongside the headline-grabbing (or not) revenue number: the timeline. Rarely does a contract begin generating revenues on the day it's awarded. Often, the revenues take months to arrive.
In General Dynamics' case, the timeline runs as follows: The $800 million-plus in potential tank-related revenues is expected to begin arriving in mid-2008, and should run through mid-2010. The bulk of the work, and the revenues, appear likely to arrive in 2009. Just a word to the Foolish.
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Fool contributor Rich Smith does not own shares of any company named above. A seven-nation army couldn't hold the Fool's disclosure policy back.
