What was Lockheed Martin Corporation's (NYSE:LMT) best defense contract in 2015? I was recently asked this question, and I have to admit: It's not easy to answer.

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The F-35 Lightning II fighter jet is probably Lockheed Martin's most famous product -- but not its best contract. Image source: Lockheed Martin.

By Lockheed Martin's own count, at least 280 significant, press-release-worthy events took place in its business over the course of 2015 -- nearly two dozen a month, or more than one significant "happening," on average, taking place every day of the work week, every week of the year. Trying to find the single "best" contract in all that would be like searching for a needle in a haystack-size stack of needles.

Nevertheless, I've done the search -- and you may be surprised to learn what I've found.

Round up the usual suspects
As Lockheed Martin bears the twin titles of both the nation's "biggest defense contractor" and "sole producer of the F-35 stealth fighter jet," you might expect to find the company's best defense contract somewhere within its world-class aeronautics division.

Indeed, that unit had a brilliant year in 2015, landing a large order for C-130 Hercules transports (the world's most popular combat aircraft that's not a fighter jet), and making significant headway on a deal to sell the U.S. military F-35s in bulk -- worth literally tens of billions of dollars. And yet, while aeronautics is far and away Lockheed Martin's biggest business division, it's not even close to being the most profitable. And when looking for "best" contracts, you really want to look beyond mere revenue and focus on the profits they (hopefully) generate.

Crunching the numbers
To figure out which of Lockheed Martin's business divisions is its most profitable, I turned to the data gurus at S&P Capital IQ and pulled up the revenue and operating profit numbers for all five of the company's big business divisions. I compared them to see which one does the best job of extracting profitable pennies from revenue dollars. Here's what I found:

Division

2011

2012

2013

2014

YTD 2015

Aeronautics

11.2%

11.2%

11.2%

11%

11%

Information Systems and Global Solutions

8.5%

8.3%

8.4%

8.3%

7.5%

Missiles and Fire Control

13.8%

16.2%

17.8%

16.9%

16.9%

Mission Systems and Training

8%

8.7%

11.1%

10.1%

10.8%

Space Systems

12.8%

12.8%

13%

12.7%

13%

Data courtesy of S&P Capital IQ.

Lockheed Martin's aeronautics division produces nearly twice as much revenue as any other single division -- but as you can see, it's far from Lockheed's most profitable business. In fact, it ranks only No. 3 in terms of profit margin. Fact is, Lockheed makes a whole lot more profit from each revenue dollar run through its missiles and fire control division -- more than in any other business Lockheed owns.

Best of the best
It's for this reason that, when choosing Lockheed Martin's best defense contract in 2015, I'm going to skip right past the C-130 and F-35 deals, and head straight to missiles and fire control. It's there we find Lockheed Martin scoring not one, but two very significant wins in 2015:

  • A $1.1 billion December 2015 order to supply Patriot Advanced Capability-3 (PAC-3) missiles and PAC-3 Missile Segment Enhancement (PAC-3 MSE) missiles to the U.S. Army, and to the militaries of Saudi Arabia, South Korea, and Qatar.
  • And five months before that, a $1.5 billion July order to supply these same weapons systems to the Army, Saudi Arabia, South Korea, and Qatar... and to Taiwan and the United Arab Emirates besides.

Taken together, these two contracts amount to $2.6 billion worth of ultra-high-margin revenue for Lockheed Martin, and operating profits of $440 million at current profit margins. That's more than $1.43 in profit for every share of Lockheed Martin stock outstanding.

Why this matters to investors
Seeing Lockheed Martin make big wins in its most profitable business segment is good news for investors already. But seeing Lockheed Martin expand its sales presence in the crucial international arms markets of Southeast Asia and the Middle East? That's just key. Historically, these are markets where Lockheed rival Raytheon (NYSE:RTN) has dominated the competition. Indeed, in recent years, Raytheon has collected as much as 25% of its revenue -- or more, internationally, with the Mideast and Asia-Pacific being Raytheon's two most lucrative markets.

For this reason, I'm going to hazard hyperbole here, and predict that if Lockheed Martin can make it here, it can make it anywhere. And that's just one more reason that the Patriot sales contracts were Lockheed's best contracts in 2015.

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Lockheed Martin's PAC-3 Patriot missile sales are blasting off. Image source: Lockheed Martin.

Rich Smith owns shares of Raytheon. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 311 out of more than 75,000 rated members.

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