Two months ago, we told you about an astoundingly large contract that America's Defense Security Cooperation Agency, or DSCA, was negotiating with the Government of Saudi Arabia. For a purchase price of roughly $1 billion, Raytheon (NYSE:RTN) would produce and ship to Saudi a total of more than 15,000 anti-tank rockets, or more specifically:
- 9,650 BGM-71 2A Tube-launched, Optically tracked Wire-guided (TOW) Radio-Frequency (RF) missiles.
- 4,145 BGM-71 2B TOW Aero RF missiles.
- 1,000 BGM-71 2A TOW missiles.
- 750 BGM-71 2B TOW missiles.
- An assortment of 154 "fly to-buy" TOW2B and TOW2A missiles.
The question we asked then was what, precisely, the Royal Saudi Land Force planned to do with all of these missiles. And now we think we know. They're going to load them onto thousands of new light armored vehicles manufactured by another defense contractor entirely: General Dynamics' (NYSE:GD) Canadian subsidiary, General Dynamics Land Systems-Canada.
On Friday, you see, Canada's Ministry of Foreign Affairs, Trade, and Development announced what it called an "historic" deal to sell up to $13 billion worth of light armored vehicles to Saudi Arabia. The specific model of light armored vehicle has not been revealed, but odds are it is some variant of GDLS's LAV-25 or LAV III combat vehicles -- both 8x8 wheeled, not tracked, armored vehicles suitable for desert warfare in the Gulf region.
In 2011, DSCA brokered a deal to have GDLS-Canada sell 82 LAV-class light armored vehicles to Saudi Arabia for a total purchase price of $350 million -- or approximately $4.3 million per vehicle. Friday's Canadian announcement, therefore, at $13 billion in potential value, suggests that the latest Saudi purchase could exceed 3,000 armored vehicles in size. GDLS's LAV vehicles are capable of carrying TOW armaments, and would be logical choices to carry the 15,000-plus TOW missiles that Raytheon is selling to the Saudis. And with 3,000 vehicles to work with, the Saudis will have plenty of carriers for their new missiles.
What it means for investors
So far, all of the above is just educated guesswork as to which missiles the Saudis will pair with which delivery systems. But here are a few cold, hard facts you can count on: December's $1 billion arms deal amounts to more than 4% of Raytheon's annual revenues -- for just one contract. This week's bigger, $13 billion contract is big enough to cover five full months of work for General Dynamics.
And these are only the tip of the iceberg (so to speak). Just a few years ago, Saudi Arabia negotiated an arms package with Washington that promises to be the biggest foreign weapons deal in American history -- as much as $90 billion in value. In short, the Middle East in general, and Saudi Arabia in particular are turning into a gigantic export market for U.S. defense contractors. Any defense contractor that doesn't grab a piece of this market is missing out on a bonanza.