The competition to build the U.S. Army's next service pistol is heating up -- and the Beretta M9 is back in the fight.
As we reported last summer, the Pentagon is not happy with its current standard-issue Beretta M9 semiautomatic pistol. Common complaints range from the lack of stopping power of 9mm bullets fired from the M9, to concerns about the reliability of the weapon itself -- and its cost. As one Army spokesman noted at the time: "It's costing us more to replace and repair M9s than it would cost to go get a new handgun."
Result: The Army intends to replace its entire armory of Beretta M9 semiautomatic pistols with a new "Modular Handgun System." And at an estimated $1,000 to $1,500 per weapon, times 400,000 weapons needing to be replaced, this works out to a contract worth anywhere from $400 million to $600 million.
That's a big opportunity -- roughly equal to one-to-one-and-a-half times the annual revenues that Smith & Wesson (NASDAQ:AOBC) or Sturm, Ruger take in from handgun sales through all channels in a year. It's a big enough opportunity to attract the interest of everyone who is anyone in the gun industry.
So far, official confirmations of who will be bidding are hard to come by -- but we do know the identities of a few bidders. For example, in November, Smith & Wesson confirmed it will team up with defense contacting heavyweight General Dynamics (NYSE:GD) to put forward a version of the S&W Military & Police pistol line.
Last month, Beretta, too, confirmed that it will make a bid to remain the U.S. Army's gunmaker of choice, announcing the release of the M9A3 handgun, a new version of the Beretta M9 featuring:
- 9mm Luger ammunition (9x19mm Parabellum)
- A magazine with 17 rounds' capacity (and the ability to take larger mags)
- A threaded barrel (for affixing silencers)
- A 3-slot military standard Picatinny rail (for affixing other accessories such as laser sights)
- An "earth tone" finish -- tan rather than standard black
- Assorted other improvements.
As you can see, there's nothing particularly revolutionary in this lineup that Beretta is proposing. A place to attach laser sights -- but no actual laser guns. More seriously, Beretta's decision to feature the Beretta M9A3 with specifications for 9mm ammunition also seems at odds with the military's dissatisfaction with the M882 9mm NATO round.
What it means for investors
This makes Smith & Wesson's entry into the competition alongside General Dynamics especially interesting. You see, here at The Motley Fool, we're as interested as anyone else in keeping up with developments within the military-industrial complex -- but what we really enjoy is figuring out how this kind of news affects investors' portfolios.
S&W's alliance with GD has the potential to do that, if it can defeat the new Beretta M9 variant. Here's how:
General Dynamics is more than just a gunmaker. (It's a tank maker, and a maker of nuclear submarines, and of surface warships, too). General D is also a major manufacturer of ammunition for the military, supplying hundreds of millions of rounds of small-caliber (and large-caliber) ammunition annually. According to General Dynamics' most recent 10-K filing with the SEC, munitions and armaments contributed $1.8 billion in revenues to the company's $6.1 billion Combat Systems business (data from S&P Capital IQ).
As such, the company is almost uniquely situated to cater to the Pentagon's preference for a new caliber of ammunition more effective than the M882 9mm standard (.357 SIG, .40 S&W, and .45 ACP rounds are rumored to be under consideration), perhaps specially designed to work well in a new pistol from Smith & Wesson. Or, an alliance between the two companies might be able to offer the Pentagon a "deal" on the up-front cost of handguns, hoping to make it up later on selling the Pentagon bullets. Because as any gun owner can tell you, over the lifetime of a gun, you spend a lot more on the bullets than on the gun itself. (We call this the razor-and-blade business model.)
When you get right down to it, it's hard to speculate precisely how all this will play out. But even so, you have to figure that a team including Smith & Wesson (handguns specialist) and General Dynamics (munitions specialist and confirmed Pentagon-contracting insider) should be admirably placed to design a "modular system" that meets the Pentagon's needs.