War is not cheap. Defending against it can be downright expensive.
For 50 days in July and August, Hamas and Israel went at it hammer and tongs, with the former firing missiles into Israel and the latter responding with airstrikes and punitive raids on the ground. Defensively, Israel attempted to shoot down Hamas' missiles with interceptors fired from the Iron Dome air-defense system -- and it cost the nation.
Over the course of the conflict, Israel said it detected upward of 4,500 rockets and mortar rounds launched from Gaza. The vast majority of these missiles either misfired, landed in Gaza itself, or fell harmlessly in more or less unpopulated areas of Israel. According to the Jerusalem Post, though, Iron Dome "shot down" at least 735 Hamas missiles -- a number Israel said represented between 85% and 90% of all missiles heading toward population centers.
Total cost of those shootdowns: at least $40.8 million, and perhaps as much as $86.5 million.
Millions, and now more millions
We come at these figures by estimating the number of Iron Dome "Tamir" interceptor missiles that must have been fired to generate, at an 85% to 90% effective rate, 735 "shootdowns" -- then multiply each Tamir by its estimated purchase price of $50,000 to $100,000. But it turns out, the cost of the missiles Israel fired during "Operation Protective Edge" this past summer are only the beginning.
Because now Israel has to replace those missiles, and buy even more missiles to upgrade Iron Dome further for the next war. (Because in the Middle East, it seems there's always a "next war.")
And so, on Tuesday, we learned that Raytheon (NYSE:RTN) has just inked a contract to supply Israeli defense contractor Rafael Advanced Defense Systems with $149.3 million worth of components needed to build new Tamir interceptor missiles. The deal is the first of its kind made public to date.
Details on the contract are few at present. When I asked Raytheon to elaborate on the types of components it intends to supply to Rafael, their value relative to the cost of a fully assembled missile, and the number of missiles Rafael intends to manufacture, the company was understandably reticent to elaborate. Raytheon did confirm that this is the first announcement of an Iron Dome sales contract, with dollar figures attached, since the company announced it was "teaming up" with the Israeli company to market the Iron Dome system in the United States.
What it means to investors
Suffice it to say, this is big news for owners of Raytheon stock (such as yours truly). It's our first definitive proof that Raytheon has moved beyond the "PR" stage in its cooperation on Iron Dome, and is beginning to generate PR ... O-F-I-T-S from the business.
And not just any profits, but profits of the beaucoup variety. Missile systems such as Iron Dome are Raytheon's bread and butter and the company's largest source of revenue, accounting for more than $1 of every $4 the company takes in annually, according to data from S&P Capital IQ. They're also an above-average profit generator for Raytheon, producing an operating profit margin of 12.6% over the past 12 months, 20 basis points ahead of the company's total operating profit margin.
In missile defense, much of these profits came from Raytheon's legacy Patriot air-defense system. Now it appears Raytheon has won a piece of an even more effective weapon, which scores at least 85% effectiveness in shooting down incoming missiles (versus anywhere from 40% to as little as 9% for Patriot). And with Rafael placing a bulk order for $149 million worth of Iron Dome parts -- a value two to three times as large as the cost of all Tamir missiles fired during the recent Gazan conflict -- it appears the Iron Dome program is ramping up rapidly.
For Raytheon stock owners, that's nothing but good news.