You get a Pentagon contract! And you get a Pentagon contract! Every ... body ... gets ... a Pentagon contract!
It was a real Oprah moment at the Department of Defense last week. Once upon a time, all defense investors could hope for was that they had "backed the right horse" in the race to win a contract to build 10 new Littoral Combat Ships for the Navy. Lockheed Martin
Now here's the surprising part: The plan turned out even better than hoped.
Christmas comes early
Expecting it would have to pay $5 billion to acquire 10 ships (plus some computer system extras), the Pentagon found its bidders unusually generous in their offers. So generous, in fact, that it says it believes it can secure fixed-price contracts for 20 ships for an amount it previously expected would buy only 15. Translation: The two firms appear to be pricing their boats not at the expected $500 million apiece, but at the low, low price of just $375 million a pop.
It's basically a reprise of Boeing's
Why? There are a couple of reasons. First and most obviously, General D and Lockheed Martin both walk away winners. The aggressive pricing poses a risk to their profit margins, but I doubt they would have bid so low if they didn't think they could make a profit on the deal. Second, by giving each bidder a contract, the Pentagon is eliminating the risk that a losing bidder will hold up the production process by challenging the award.
That's good news for the Navy, which will get its ships not just cheaper, but sooner. And it's absolutely fabulous news for investors, who now have more faith in their companies' revenue streams.
Defense from taxes
In other naval news, Northrop Grumman
Remember, across the length and breadth of the defense market, we've been seeing buyers regularly paying one times sales and up when bits and pieces of defense companies change hands. If Northrop's shipbuilding unit does about $6 billion in business annually (and it does), this suggests a market cap of closer to $6 billion on the spinoff would be more appropriate.
Then again, if Northrop's castoff really does price at just $2 billion when it goes independent, this suggests there's huge upside to be reaped by fishing this bit of flotsam out of the drink. We're talking a discount so big as to make the 67% and 92% discounts relative to one-times sales on Textron
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