Is General Dynamics (NYSE:GD) about to land a $6.5 billion tank sale?
Newspapers believe it might. Last week, German daily Handelsblatt reported that Saudi Arabia is in the process of backing out of a deal to buy $6.5 billion worth of Leopard 2 tanks built by local defense contractor Krauss-Maffei Wegmann GmbH. Owing to the country's Nazi past, arms sales are a sensitive subject in modern Germany, and the tank sale has been the subject of hot debate locally, stalling its finalization. Handelsblatt notes that if the deal does in fact fall apart, the Saudis may reach out to General Dynamics and ask to buy more of that company's Abrams main battle tanks instead.
Asked about the report, General Dynamics declined to comment on the "speculation." But Reuters reported Friday that according to its sources, at least, General Dynamics is in fact already in talks with the Saudis about picking up where Krauss dropped the ball. General Dynamics is, after all, already in the process of upgrading the Saudi tank fleet of M1A1 and M1A2 Abrams tanks to the Saudi-preferred M1A2S configuration. Now, the speculation is that General-D could win a contract as much as 10 times as big as its upgrade deal, and build the Saudis a fleet of brand-spanking-new main battle tanks.
Shareholders would certainly cheer the prospect of a $6.5 billion weapons deal for General Dynamics, which like other contractors has been slogging through a recent dearth of contract awards. But there is another possibility here -- that after the Leopard deal falls through, the Saudis may decide not to buy any tanks at all.
After all, they're kind of running out of people to point tanks at. Shiite-dominated Iraq's in a bit of a shambles right now, and troublesome Syria's in even more dire straits. Jordan is friendly. Egypt, far away. Iran, a perpetual rival to Sunni Saudi Arabia, remains one rather large pond out of firing range for tanks of any manufacture. And as for Israel, The Wall Street Journal just reported that the Israeli Defense Forces are retiring ground units, cashiering officers, mothballing warships, and, in general, looking to cut military spending by some $830 million.
In such an environment, buying 270 new tanks to bolster a Saudi arsenal that already boasts nearly 1,100 main battle tanks may not make a whole lot of sense.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.