Why Lockheed Martin and General Dynamics Just Declared War on Rocket Engines
What do Iranian drones have in common with Russian hypersonic missiles and China's DF-21D "aircraft carrier killer" rocket? All three pose a clear and present danger to U.S. forces and their allies, and all three require air defense missiles to protect against this threat.
That's a problem for the U.S. and allied militaries, though, and for defense companies like Lockheed Martin (NYSE: LMT) and RTX Corporation, makers of the famous PATRIOT air defense missile (as well as many other missiles, such as the just as famous HIMARS rocket in use today in Ukraine).
Defense products, you see, involve long supply chains — similar to what one sees in the automotive industry — where one company may produce a final product (like a PATRIOT) but depends on subcontractors to produce the components that go into that final product. You probably recall how shortages of low-tech automotive semiconductor chips resulted in widespread shortages of cars during the pandemic, for example. Well, today, slow shortages of rocket engines pose a bottleneck to the production of rockets by America's defense companies, too.
From problem to solution
The Wall Street Journal reports that Northrop Grumman and L3Harris are the two defense giants that dominate the production of missile engines. Both have caught flak from Lockheed and RTX for their failure to produce enough to meet demand. To remedy this situation, Lockheed Martin has proposed that it get into the rocket engine-making business itself.
It's a big job, though, and Lockheed can't do it alone. Last week, the company confirmed it would form a joint venture with defense rival General Dynamics (NYSE: GD), aiming to develop a new generation of military missile motors to supplement the constrained supply produced by Northrop and L3Harris.
In this partnership, Lockheed will apparently act largely as a silent partner (and exclusive customer), although assisting with the design and testing of the engines. General Dynamics will do the actual manufacturing at its Camden, Arkansas, munitions factory and then ship them next door to Lockheed Martin's Guided Multiple Launch Rocket System (GMLRS) rocket assembly plant. GMLRS is one of the primary weapons launched by HIMARS rocket launchers. Having General Dynamics fulfill all of Lockheed's motor needs for this one type of missile should diminish demand for motors for other missiles, thus helping to unkink the supply chain both for Lockheed — and for everyone else.
What it means for Northrop and L3Harris
In the long term, the joint venture could expand its production to provide motors of other missile types produced by Lockheed and by other buyers, as well — creating a permanent rival to Northrop and L3Harris in the missile engine market.
L3Harris's Aerojet Rocketdyne subsidiary supplies only 5.4% of the company's total annual revenue, according to data from S&P Global Market Intelligence, limiting its exposure to this new threat. The effect on Northrop Grumman is harder to parse. Rocket motors are part of the company's space systems division (which is quite large, accounting for 35% of Northrop's annual revenue).
It's hard to tell, however, how much of this revenue comes from rocket motors in particular.
What it means for Lockheed Martin and General Dynamics
What does seem clear is that the new joint venture has the potential to benefit Lockheed Martin and General Dynamics quite a lot. Northrop Grumman earns a respectable 8.7% operating profit margin on its "space" business, while L3Harris's Aerojet unit generates even better profit margins of 11.6%.
Those aren't bad numbers at all, assuming a Lockheed-GD joint venture can duplicate them. Moreover, if expanding the production of rocket engines helps Lockheed to sell more complete missiles to its customers, the operating margins at Lockheed's missiles and fire control division average 12.9%! Growing sales in that unit would clearly be a big boost to its business.
As for General Dynamics, the fourth part of this four-way dynamic could benefit most of all. GD's combat systems division would do the heavy lifting in building all these new rocket engines (I should also point out that Lockheed wants to grow GMLRS production by 40% this year). GD already earns 13.9% operating profit margins on its combat systems sales — making it easily the company's most profitable business.
Simply put, if this deal comes together, General Dynamics stock will be the biggest beneficiary of all.
Should you invest $1,000 in General Dynamics right now?
Before you buy stock in General Dynamics, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and General Dynamics wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $792,725!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 22, 2024
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.
Why Lockheed Martin and General Dynamics Just Declared War on Rocket Engines was originally published by The Motley Fool
Breaking news
See all
