The new RFP is here! The new RFP is here!
It's the moment we've been waiting for, defense investors. This week, the Pentagon issued its final request for proposals on one of the biggest defense projects to come down the pike in ... well, awhile. Not the KC-X deal -- no, Boeing
This time, we're talking 'bout the Littoral Combat Ship.
LCS me ASAP
If you haven't heard about the Navy's newest close-to-shore toy, then let me bring you up to speed -- and speed really is key with this ship. The competing variants built by Lockheed Martin
Each ship clocks in with a top speed of better than 40 knots -- one of the fastest clips in the modern Navy. Such roadrunner-like sprinting, combined with the vessels' shallow drafts (13.5 feet for Freedom, and just 10% deeper for Independence), makes the LCS class uniquely qualified for operations in shallow waters close to shore ("littoral" waters -- hence the name). So whether drug interdiction's your bag, or coast-guarding, or Somali pirate chasing, chances are the LCS is the ship for the job.
Speaking of the job, though, the hourly rates for these contractors don't come cheap. Lockheed's first attempt at building the boat cost taxpayers $637 million, while General D's prototype rang in at a budget-busting $704 million. Future models are expected to cost quite a bit less, fortunately. And they'd better, because Congress has already capped the price it's willing to pay at $460 million per ship.
Still, that works out to in excess of $25 billion in total revenues for the project, as the U.S. Navy fills out its wish list for 55 of 'em.
As for who will claim all that loot? Well, that remains to be seen. This week's RFP asks both of the prime contractors to submit bids for a batch of 10 LCSes, additional to the two already completed. Assuming the contract is awarded on a fixed-price basis, we're probably looking at $4.6 billion or thereabouts for whoever wins this first round of the competition. That said, the Pentagon's effort to force its contractors to compete on price could well backfire down the road. Logically, whoever wins this first tranche of the project will develop economies of scale, and expertise in shipbuilding that will serve it well in future competitions.
The risk, therefore, is that even if it gets a good price on the first batch of ships this year (bids are due in late March), the Pentagon could find itself locked into a sole-source situation in years to come.
Working the odds
So who's best positioned to berth all these profits? It's hard to say.
Lockheed took an early lead in August, when in a report on test runs of the new Freedom, the Navy gushed "it's got only 21 material deficiencies!" (Which sounds bad, but is just one-tenth the usual glitch-rate.) On the other hand, word has it that General Dynamics' Independence has also performed very well in tests. And judging from Pentagon comments, if both ship designs meet its requirements, the deciding factor will most likely turn out to be ... sticker price. Whoever promises to perform the contract at the lowest price, should win.
If you're of a mind to gamble on the winner, therefore, your best bet may be to put your money on neither contender, and seek out a sure thing instead. For example, Alcoa
Or you could play the odds by buying shares of Raytheon
Last but not least, consider a real dark-horse candidate -- iRobot
Someone's going to win LCS, but we don't know who. But whoever does win, the arrival of this new warship could be a gamechanger for iRobot.
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Fool contributor Rich Smith does not own shares of any company named above. General Dynamics is a Motley Fool Inside Value selection. iRobot is a Motley Fool Rule Breakers recommendation. The Fool has a disclosure policy.