This article was updated on April 5, 2017, and originally published on Jul. 19, 2014.
The U.S. military has a reputation as a somewhat secretive organization. But in at least one respect, the Pentagon is one of the most "open" organizations on the planet.
Take the U.S. Navy's new superweapon, the electromagnetic railgun. Capable of lobbing projectiles at speeds in excess of Mach 7 -- 5,000 mph -- to destroy targets as much as 110 miles distant, Rear Adm. Bryant Fuller, the Navy's chief engineer, calls the EM railgun "an incredible new offensive capability for the U.S. Navy."
It's the kind of project you'd expect to be labeled "top secret..."
But instead, the Navy's outlining its progress every step of the way -- and in public, where investors can watch.
In November 2016, the Navy conducted land-based test firings on a working prototype EM railgun. Before those trials could take place, however, the Navy had to pick companies to build its prototypes -- names like General Atomics, BAE Systems (NASDAQOTH:BAESY) (LSE:BA) and Raytheon (NYSE:RTN).
At least two of these companies -- BAE, which built one of the Navy's two prototype railguns (General Atomics built the other), and Raytheon, an expert in "smartening up" unguided cannon rounds -- have also been hard at work ramping up the power needed to operate the railgun.
BAE was originally awarded a modest, $11.6 million railgun contract back in December 2011. In 2014, it received a fourfold boost in funding when the Navy awarded it a $43.2 million follow-on contract to continue R&D work on the railgun's "Integrated Power Systems power load modules" through December 2016.
Raytheon, which got its first railgun power load module contract (worth $10.1 million) in October 2011, received nearly as big an increase in funding. Its $33.2 million, 2014 contract "modification" also ran through the end of 2016.
What it means to investors
With fiscal 2016 sales of $22 billion, and $24.1 billion respectively (according to data from S&P Global Market Intelligence), even these multimillion-dollar railgun contracts represented mere drops in the revenue bucket for BAE and Raytheon. Long-term investors, though, should focus on what these contracts could mean for the companies in the future.
The U.S. Navy sank $240 million into R&D on its railgun through "Phase I" of the project. As Phase II draws to a close, the Navy has budgeted another quarter-billion dollars to "advance the technology for transition to an acquisition program." So already, we're looking at a $500 million weapons program -- before a single combat-ready railgun has been purchased.
Going forward, investors will want to keep an eye out for additional development contracts at BAE and Raytheon. So far, we haven't heard of any major hitches in the railgun's development. So assuming things continue moving ahead smoothly, we'll want to next look for contracts to develop and upgrade the $25,000-per-projectile ammunition that will form the literal "shooting end" of this new weapons system.
My guess is that Raytheon's work on developing the incredibly accurate, long-range Excalibur cannon ammunition for the Army gives this defense contractor a leg up on winning railgun ammunition contracts.
One final, possible player in ammunition contracts would be Northrop Grumman (NYSE:NOC), which is assisting DARPA in developing a new technology for equipping "dumb" munitions with internal chips for guidance to their target -- "Chip-Scale Combinatorial Atomic Navigators," or C-SCAN. Key to Northrop's involvement would be C-SCAN's ability to survive a high-velocity, Mach 7 discharge, which is not yet proven. But if it works as billed, C-SCAN could enable Navy railguns to hit targets more than a hundred miles away, and without any need to rely on jammable GPS transmissions to find their target.
Northrop's work for DARPA started out at a low dollar value of just $648,000. But like BAE's and Raytheon's work on the Navy's new railgun, it's a project with real, transformative potential. And thanks to the Pentagon's penchant for detailing its progress in press releases, investors can follow the money every step of the way.
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