Thirty two years ago, truck bombs struck the U.S. military barracks at Beirut International Airport, claiming 241 American lives and sparking a broad withdrawal of U.S. peacekeeping troops from Lebanon. Now we're going back -- or at least our military equipment is.
According to Business Insider, the Lebanese military is currently the second weakest in the Middle East (second only to Yemen's, which is barely even a state anymore). Flightglobal's latest report on the status of Lebanon's military says the country has only six fighter aircraft in its air force -- three Cessna 208 turboprops, and three Hawker Hunter subsonic fighter jets. GlobalFirepower.org notes that Lebanon spent just $1.7 billion on its military, ranking it in the bottom half of global military spenders last year, behind not just neighbors Israel and Turkey, but Syria and Egypt as well.
With so little money to spend but such grave threats to its security, Lebanon must cobble together an air force on a budget. And a handful of interesting reports out of Washington, D.C., are showing us how it intends to do that.
What's going to work? Teamwork!
Late last month the Pentagon announced that it has awarded defense contractor Orbital ATK (OA) a $26.1 million contract to militarize a "commercial-off-the-shelf Cessna 208B Caravan." The Caravan is actually built by Cessna, a unit of fellow defense contractor Textron (TXT 0.61%). Orbital ATK has been enlisted to add a missile warning system, chaff dispensers, and targeting and communications gear to Textron's Cessna -- as well as "hard points" for arming the aircraft with Hellfire missiles.
The Pentagon opened up its checkbook Thursday, awarding contracts worth a total of $1.38 billion. Among the more...
Not coincidentally, just one week after this contract was announced the U.S. Defense Security Cooperation Agency notified Congress of plans to sell the Government of Lebanon 1,000 AGM-114 Hellfire II missiles. The contract, once approved, will yield some $146 million in incremental revenues for Hellfire manufacturer Lockheed Martin (LMT 1.10%), and provide a large arsenal of weapons that Lebanon can deploy from its small fleet of fighter aircraft.
What have you done for [Lebanon] lately?
And there you have it, folks. One commercial prop-plane from Textron, plus a bit of tinkering by Orbital ATK, and a stack of boomsticks from Lockheed Martin, and you have an instant, budget-priced ground attack warplane for Lebanon. Similar cheap "militarized" Cessna 208s are among the top 10 most popular combat aircraft in the world. And as it turns out, this is not all Lebanon is buying from us.
Just this past week, in fact, we learned that the DSCA is back in Congress seeking approval for a sale that would instantly double the size of Lebanon's air force. Even before their new Cessna arrives, the Lebanese have begin seeking permission to buy six A-29 Super Tucano fighter planes.
Powered by a single Pratt & Whitney PT6A-68/3 turboprop engine and sporting advanced missile detection and targeting gear, the Super Tucano carries two .50 caliber machine guns and up to 3,300 pounds worth of Mk 81 and Mk 82 bombs. Our Air Force likes it so much, it's already flying support for U.S. troops in Afghanistan. The particular variant that Lebanon wants to buy will also be outfitted to fire BAE Systems' Advanced Precision Kill Weapon Systems -- which fire laser-guided Hydra rockets.
This purchase will set Lebanon back $462 million -- a good 27% of its military budget for the year, all in one shot. Not all of this will go to U.S. companies, however. Brazilian plane-maker Embraer (ERJ -0.05%) actually builds the Super Tucano, but it builds it in cooperation with Sierra Nevada Corporation here in the U.S. And Sierra Nevada has been named one of the principal contractors for this sale.
What it means for investors
Given the relative sizes of the contracts, it's clear the Super Tucano sale is more important to investors than the joint effort to militarize one single Cessna. But how is it important?
Right now, shares of the company that makes the Super Tucano, Embraer, do not look particularly attractive. Priced at nearly 52 times earnings, Embraer shares are undeniably expensive, and the fact that the company's civilian planebuilding business has been in decline the past two years doesn't add much to the attraction.
One area where Embraer has been growing, however, is in the military sphere, where defense and security revenues have climbed in each of the last three years, and now sit 69% above what the company generated in military sales in 2012. What's more, with an operating profit margin of 10% (according to S&P Capital IQ), military aircraft just happens to be Embraer's most profitable division.
Continued sales wins for its budget-priced fighter planes in the Middle East -- brokered by the U.S. Pentagon -- promise to keep sales climbing, and profits growing, for years to come.