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Riled by Russia, Poland Picks Patriot Missiles to Defend It

By Rich Smith - May 23, 2015 at 11:13AM

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And one defense contractor (or maybe two) stands to profit handsomely.

Patriot missiles at work. Source: Wikimedia Commons.

Things are heating up again over in Ukraine -- and we're not just talking about the approach of summer.

As the United States dispatches its third (and prepares to send its fourth) missile-destroying warship to counter nuclear threats from various regional bad actors, numerous media reports have emerged in recent weeks, all warning that Russian troops are preparing to resume their offensive in Ukraine.

At the same time, Ukraine's government has confirmed that it has captured two Russian special forces soldiers, part of a 220-man unit from that nation's "GRU," or office foreign military intelligence, operating in Ukrainian territory. Russia denies the claim, saying the officers had retired and taken up jobs as police officers in Ukraine's breakaway Luhansk region. Nevertheless, Ukraine plans to put the officers on trial for crimes of terrorism.

And if you think all of this is making Ukraine's neighbors nervous -- you're right.

Domino theory
Whether a new offensive begins this summer or not, whatever happens in Ukraine, one country in particular has decided it doesn't want to be next on Russian President Putin's European Tour 2015. So last month, Poland announced it's moving forward on a mammoth $43.3 billion project to bolster its military defenses.

With a shopping list ranging from German "Leopard" tanks to Finnish APCs to drones to combat helicopters, Poland has embarked upon its biggest military shopping spree in recent memory. The biggest piece of this puzzle, however, and the one with perhaps the most potential to short-circuit a Russian offensive and stop Russia's European land grabs in their tracks, is a planned purchase of anti-aircraft and anti-missile missiles -- the so-called "Polish Shield."

Raise shields -- and give Raytheon a raise
Beating out rival bids from Lockheed Martin (LMT -0.60%) and its "MEADS" consortium, and also from MBDA and Thales, Raytheon (RTN) claimed the Polish prize last month, promising its Patriot air defense system will "fully address Polish government, industry, and military expectations to meet Poland's long-term objectives for this important program, which is vital to the country's national security interests."

For this work, Raytheon will be richly rewarded.

According to Western media reports, the sum total of two contracts Poland awarded last month is $8 billion. Raytheon says precise dollar values have yet to be worked out, and we know part of this money will go to Airbus, which is selling Poland's military 50 combat helicopters. Polish newspaper Gazeta Wyborcza, however, reports that Raytheon will still earn roughly $7 billion on the contract.

Assuming that number is correct, this single Polish missile defense contract will be worth more than one full year's revenues for Raytheon's Missile Systems division -- which is already Raytheon's largest business (albeit not its most profitable). In fact, according to S&P Capital IQ, Missile Systems' 12.7% operating profit margin makes it only third out of four divisions at Raytheon. (On the other hand, this speaks volumes about how very much more profitable Raytheon's Integrated Defense and Space and Airborne divisions are.)

Even losers sometimes win
As for Lockheed Martin, despite losing the headline position on Poland's Missile Shield project, it might not be left out in the cold entirely. Lockheed does, after all, build the PAC-3 missiles that are the "shooting end" of the Patriot system. As the details of Poland's project become clearer, it could turn out that Lockheed Martin will get a piece of this work regardless.

Raytheon's Patriot will soon patrol Polish skies. Source: Raytheon.

Rich Smith owns shares of Raytheon Company. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 359 out of more than 75,000 rated members.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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