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Textron Tapped to Upgrade Ukraine's Army

By Rich Smith - Feb 6, 2016 at 2:13PM

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Soon, Textron Survivable Combat Tactical Vehicles could begin rolling onto the front line in Ukraine.

Hold on, Ukraine. The (armored) cavalry is coming. Image source: Textron.

Ukraine is locked in an undeclared war with Russia -- and so far, not a successful one. To cite just one statistic, last year, a Flightglobal analysis of Ukraine's military concluded that roughly 65% of Ukraine's air force has ceased to exist since fighting began in March of 2014.

Aside from the addition of a few unarmed drones, Ukraine hasn't made much progress in repairing the damage to its air forces. But on the ground, things are starting to look a bit different. U.S. contractors are arriving, weapons in hand -- and leaving with bags of cash.

Case in point: Earlier this week, armored vehicle-maker Textron (TXT -0.69%) announced a deal to sell Ukrainian defense firm UkrOboronProm three Survivable Combat Tactical Vehicles (SCTVs). That may not sound like much, but according to a report from Defense Update, this sale is only the first part of a much larger plan to ship to Ukraine 200 U.S. Army surplus Humvees, mate them to Textron-produced up-armor "kits," and thereby transform the humble Army jeeps into Textron-brand SCTVs.

Ukraine plans to keep some of the upgraded Humvees for itself, and locally re-manufacture others in a joint venture with Textron for reexport to third parties -- generating funds needed to further finance the rebuilding of its own military.

What is an SCTV exactly?
As Defense Update explains, Textron's SCTV begins with a basic Humvee, then surrounds it with "a new steel armored monocoque capsule, offering improved ballistic and blast protection, using V-shaped hull, and oblique side armor adding to the vehicle's ballistic and roadside IED protection." Textron notes  that to support the added weight of all the new armor, SCTV also features an upgraded engine and improvements to the vehicle's suspension.

The result is something like an MRAP -- a vehicle type that Textron has produced for the U.S. military in the past -- and will offer Ukrainian soldiers improved protection from IED attacks as well as small-arms fire.

What it means for investors
All of which is fascinating from a geopolitical perspective. But here at The Motley Fool, we're most interested in how developments such as these will affect investors' portfolios. So what exactly does this contract mean for Textron?

Textron hasn't revealed the price it will charge Ukraine to upgrade its Humvees. We can guess at the number by hypothesizing that an MRAP-like SCTV might cost something like the $500,000 or so that the U.S. was paying for its own MRAPs back when they were in active production -- but that's only a guess. Whatever that number turns out to be, investors can probably multiply it by at least 200, based on the number of Humvees the U.S. government is shipping to Ukraine.

Is $500,000 times 200 equals a $100 million contract for Textron the exact right answer? Probably not. But it might be close.

What we do know, is that in securing the SCTV deal, Textron has won itself a prime position as supplier to Ukraine's military-industrial complex. Directly translated, you see, Textron's new partner's name -- UkrOboronProm -- means "Ukrainian Defense Industry." Encompassing producers of everything from armored vehicles to rockets to fighter jets, helicopters, and radar systems, UkrOboronProm basically is Ukraine's defense industry.

According to the company's 2015 annual report , UkrOboronProm generated 14.4 billion UAH ($563 million) in revenues in the first 9 months of 2015, earning EBITDA of 2.7 billion UAH ($107 million) and net profits of 1.6 billion UAH ($63 million ) thereon. Annualized, that works out to profits of $84 million on revenues of $751 million.

And yet, for context, Textron itself did $13.4 billion in business last year (and earned $698 million in profits). Amazingly, from a revenue perspective, that means that Textron is actually 18 times larger than UkrOboronProm. So if you were wondering who is the senior partner in this new joint venture -- now you know. The bottom line for investors, of course, is that while this deal is intriguing it doesn't move the needle for Textron too much. 

Textron Survivable Combat Tactical Vehicles are Humvees -- with attitude. (And armor). Image source: Textron.

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. 251 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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