New Nuke Contract Could Be a Blast for Orbital ATK Stock

Billions of dollars are at stake as America prepares to update its nuclear arsenal.

Rich Smith
Rich Smith
Dec 5, 2015 at 8:13AM

The race to rebuild America's nuclear arsenal is heating up.

It's been a good two years now since we last heard significant news about the U.S. Air Force's Medium-Class Stage III (MCS-III) project -- a key element in USAF's Ground-Based Strategic Deterrent system. ("GBSD" is a less scary-sounding name than "intercontinental ballistic missiles bearing multiple thermonuclear warheads.")

Up goes the Minuteman. Will Orbital ATK's stock price go up with it? Image source: U.S. Air Force Master Sgt. Lorenzo Gaines.

Back then, it was Aerojet Rocketdyne (NYSE:AJRD) making headlines, and winning a contract to demo a new motor "to replace the aging SR-73 third-stage motors in the current Minuteman III Intercontinental Ballistic Missile." Two years later, one of Aerojet's key competitors, Orbital ATK (NYSE:OA), has announced its own demonstration of just such a potential third-stage replacement for the Air Force.

The dilemma
Currently, America's strategic nuclear "deterrent" consists of approximately 450 Minuteman III ICBMs, all deployed in 1970s. In addition to their warheads, each missile comprises three rocket "stages" used to loft the warheads into space, then guide them to their targets. Problem is, after 45 years of storage, a lot of these missiles are due for an upgrade.

MCS-III is the program for making those upgrades -- and it's a big one. According to the Air Force Times, upgrading the entire Minuteman fleet will cost taxpayers some $62.3 billion over 30 years. How much of that money will go to new motors is hard to say, but it's probably going to be a substantial sum.

How substantial is "substantial"?
Military-grade rocket motors are not an everyday household product -- you can't just price-check them on the Internet. As such, getting accurate data on their cost is something of a challenge. That said, through combing multiple sources, I've been able to develop a rough estimate of what it might cost taxpayers to replace 450 stage III solid-fuel rocket motors. Consider:

  • When first built, the unit cost of a fully assembled Minuteman III was $7 million -- $41.1 million in today-dollars. That gives us a ceiling value. Assuming the whole can't exceed the sum of its parts, no single stage of the missile should cost more than $41 million.
  • Various sources put the cost of an RS-68 liquid-fueled stage I rocket motor at anywhere from $14 million to $20 million in 2006 dollars. That's between $16.5 million and $23.6 million today.
  • A stage II RL-10 motor, also liquid-fueled, cost $38 million in 2011 -- that's $40.2 million today.

Both Aerojet and Orbital ATK are developing solid-fuel motors for MCS-III. And generally speaking, solid-fuel rockets cost less than liquid-fueled. This suggests that a replacement stage III motor should cost less than the numbers noted above. But even so, it seems likely that a replacement stage III motor will cost taxpayers somewhere from $20 million to $40 million -- each. Priced at the midpoint, 450 stage III motors, times $30 million apiece, could turn MCS-III into a $13.5 billion project.

Who gets the loot?
That's nearly the same cost as replacing the entire U.S. land-based nuclear arsenal with brand new Minutemen -- a fact that, once it gets out, could prove politically unacceptable, and kill the re-engining project in its cradle. (On the other hand, if Congress is already budgeting $62 billion to upgrade the nuke fleet, maybe they're already prepared to bite the bullet on cost.)

If MCS-III does go forward, it means big business to the two businesses competing for the work. The estimated total of $13.5 billion would exceed Orbital ATK's entire annual revenue stream by three times. According to data from S&P Capital IQ, it would be more than eight times what Aerojet Rocketdyne makes in a year.

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Early odds favor Aerojet winning the project. On the existing fleet of Minutemen, Orbital is the successor company to Thiokol, which built the fleet's stage I motors. Aerojet Rocketdyne, however, built both the stage II and stage III motors. Presumably, Aerojet is therefore better positioned to build the engine to replace the third stage, as well -- but for now that's just a theory.

Stay tuned to the Fool as the project develops. We'll keep you up to date on those developments.