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Raytheon Plays a New Patriot Card

By Rich Smith - Apr 2, 2013 at 10:23AM

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A plan to recertify and upgrade Patriot missiles has merit.

Raytheon's (RTN) Patriot missile system blasted onto the world stage in 1991, when the missiles famously sheltered U.S. troops in Saudi Arabia, and Israeli civilians in Israel, from a furious swarm of Scud missile launches by Iraq's Saddam Hussein.

In fact, though, the Patriot's been in active deployment since as far back as 1984, and this poses a problem for Raytheon. With an expected shelf life of 30 years, many of the 10,000-plus Patriot missiles lining military armories around the globe are beginning to approach obsolescence.

On the plus side, this might give Raytheon an opportunity to sell its customers newer, better missiles to replace the aging Patriots they already own. The company's continually innovating the product, after all, and in partnership with Lockheed Martin (LMT -0.34%), has racking up mongo sales of their new PAC-3 configuration of missile-and-launcher.

On the other hand, though, any time a customer is forced to think about replacing its hardware, a risk arises that it might choose to buy its replacements from... somebody other than Raytheon. Russia's S-300 and next-gen S-400 systems, for example, have proven very popular among Third World militaries. Israel's new Iron Dome technology, if it becomes available for sale, could also become a contender. So what's a defense contractor to do?

Offer upgrades.

On Monday, Raytheon announced that the U.S. Army has approved the Patriot for "recertification." What this means, in essence, is that for a small fee -- Raytheon says it will be a mere "fraction of the cost of replacing them with alternative interceptors" -- Raytheon can check the oil and rotate the tires on a customer's Patriot inventory, and if everything checks out, extend the missile's approved lifespan by 15 years, to 45 years in total. Alternatively, Raytheon can upgrade the missiles to their latest, most advanced GEM-T configuration (as the Army recently paid if $46.7 million to do).

So recertify or upgrade -- pick whichever alternative you like, says Raytheon. Just don't make the mistake of going with an "alternative interceptor" from some other company.

Foolish takeaway
Seems to me, this is good policy on Raytheon's part. Sure, selling entirely new missiles would generate greater sales for the company (which booked $24.4 billion in 2012). But the revenues from a recertified bird in the hand is worth two uncertain sales of birds in the bush. And the longer Raytheon can keep its customers loyal, and doubling down on their Raytheon-produced products, the less likely they'll ever choose to switch to an unfamiliar supplier years down the road.

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