Five down, 27 to go. That's where the United States Littoral Combat Ship program stands today.
According to Pentagon planning, the U.S. Navy will buy a total of 32 Littoral Combat Ships (LCS) from contractors Lockheed Martin (NYSE: LMT) and Austal (NASDAQOTH: AUTLY) through about 2019. Pentagon estimates put the cost of each "seaframe" at about $479 million in fiscal 2016. Including inflation over the course of the program, the total cost of all 32 vessels is estimated at $21.8 billion. "Mission Packages" (guns, missiles, sensors) will add $7.2 billion to the ships' cost, for a total program cost of perhaps $29 billion.
About half these ships will be built by Austal and its subcontractor, General Dynamics (NYSE: GD). The other half will come from Lockheed Martin and its partners, which include shipbuilder Marinette Marine. Progress, however, has been slow. Lockheed's third LCS, christened the USS Milwaukee (LCS 5) was commissioned into service just this week.
So with just four years remaining in the program, LCS is less than 20% of the way toward its goal.
What's an LCS?
A unique concept in naval shipbuilding, the Littoral Combat Ship can perhaps best be thought of as an oceangoing "Lego set." The ship itself is the base plate in the Lego set, onto which can be fastened whichever Lego bricks (Mission Modules) are necessary to construct a given Mission Package for the warship.
So, for example, an LCS dispatched on a surface warfare mission might be outfitted with modules including Mk 46 cannons, surface-to-surface missiles, and an MH-60R Sikorsky Seahawk helicopter (now, incidentally, also built by Lockheed Martin). Later on, this same LCS could be assigned a minesweeping mission. To prepare for it, the cannon and missiles would be offloaded, and replaced with extra sensors and a squadron of unmanned mine-seeking robotic submarines.
Upgrading the Lego set
Once the last of these LCSes has been built, the Navy will ask its contractors to switch over to construction of a very specific type of LCS -- tailor-made for surface warfare missions -- which the Navy has decided to designate a "frigate."
This new design, which should enter into production circa 2020, will boast improved armor, and a standardized weapons package including anti-air, anti-ship, and anti-submarine missiles, machine guns, and a 57 mm cannon. The Navy is projecting that the new frigate design will cost "less than 20% more" than the preceding LCS design -- but precisely what that means in dollars and cents is unclear.
Summing up: What it means for investors
With 20 frigates to be built, "less than 20% more" might mean a price tag in excess of $1 billion at the high end ($29 billion / 32 LCSes = $900 million per LCS x 1.2). To put that in context, each frigate could potentially provide its builder with as much revenue as Austal currently generates in a year.
Or, at the low end, "less than 20% more" of an LCS's $479 million seaframe cost, with no additional cost for Mission Packages, could work out to a per-ship cost of as little as $575 million per frigate. According to data from S&P Capital IQ, that's still half a year's revenue for Austal.
Either way, the LCS/frigate program is clearly a big opportunity for the companies involved. Over the course of 52 ships built, it's likely to yield anywhere from $40 billion to $50 billion for the companies involved.
As the program continues to evolve, you can be certain we'll keep you up to date as the numbers evolve with it.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 308 out of more than 75,000 rated members.
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