Navy's Third Missile-Destroying Warship Arrives in Europe (Whom Will Russia Invade This Time?)

By Markets Fool.com


USSDonald Cookleading a flotilla of destroyers. Photo:Wikimedia Commons.

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Fifteen months ago, the United States dispatched the USS Donald Cook (DDG 75) on a not-very-secret mission: to carry America's latest missile defense technology to Europe, there to set up a system to shoot down rogue nukes.

One month later, Russia invaded and annexed Crimea.

Cause, effect?
Now, there may not have been a direct cause-and-effect relationship between these two events. We do know, however, that Russia had been complaining about NATO's eastward expansion for quite some time. And Russian President Vladimir Putin was particularly upset with plans to bring the new "Aegis" ballistic missile defense, or BMD, technology to Europe. This doesn't necessarily mean that Aegis BMD is too dangerous a technology to use, however -- or that it holds no potential for defense investors.

Addressing the Russian Federation Council in 2013, Putin blasted Aegis as "a significant component of a strategic offensive potential." Responding to explanations that Aegis was defensive in nature, Putin mocked: "We are perfectly aware that missile defense systems are defensive only in name." Within the Russian Foreign Ministry, diplomat Mikhail Ulyanov threatened "withdrawal from the [START nuclear nonproliferation] treaty" if Aegis came to Europe.

Now Aegis has come to Europe -- and not just once, but thrice.

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USSDonald Cookand sister ships shown transiting the Atlantic. Photo:U.S. Navy.

Red rover, red rover, send another guided missile destroyer over
Not long after the Cook arrived to take up station at Spain's Rota naval base in 2014, it was joined by sister-ship USS Ross (DDG 71), also equipped with Aegis BMD. Last week, a third ballistic missile-destroying warship, USS Porter (DDG 78) arrived in Rota, making it a threesome.

Once USSCarney(DDG 64) arrives later this year, the final complement of four Aegis-equipped guided missile destroyers will be complete.

What happens next?
This could be bad news or good news. On one hand, Russia could interpret the fourth and final planned deployment of an Aegis BMD destroyer as a provocation deserving response -- and their responses to date have been anything but restrained. On the other hand, although the U.S. has other Aegis BMD destroyers, only four destroyers (and two ground stations) have been tasked with building the European missile "shield."

Once those ships are in Europe and bases built (in Poland and Romania), the opportunities for Russia to take offense to new provocations would appear limited.

On the third hand, though, there's a big difference between shipborne ballistic missile defense, and land-based batteries: Ships move.

We saw this factor in play last April, when the Cook was dispatched to "show the flag" off Crimea after Russia's invasion of Ukraine. Within hours of the destroyer's arrival, it was buzzed by a pair of Russian fighter bombers, indicating displeasure at its presence.

What does it mean to investors?
Why was Russia so upset? Part of the reason may be (as we recently learned) that President Putin had been planningto install nuclear missile sites in Crimea. Cook's sudden appearance, demonstrating the U.S. Navy's ability to sail in and drop anchor, setting up a floating missile defense battery right offshore, must have come as a shock -- and a disincentive to put nukes in Crimea.

And here's where things get really interesting for investors. The mobile nature of Aegis BMD may now cause Russia to think twice about setting up nuclear shop in Crimea. Far from escalating the conflict with Russia, therefore, Aegis BMD could have the potential to prevent a new crisis from arising. This unexpected benefit may inspire the Pentagon to buy even more Aegis BMD systems.

In fact, just this past month, the Department of Defense placed an order with Raytheon , maker of the SM-3 interceptor missiles that go into Aegis, for 44 Standard Missiles for use in BMD -- at a cost of $599 million. This contract appears additional to the $2.9 billion in BMD-related missile contracts Raytheon has already received. Meanwhile, Lockheed Martin has booked contracts for at least $1.8 billion to outfit destroyers and land bases for BMD, and Boeing , Orbital ATK and others have won Aegis work as well.

In total, building the European missile shield is expected to produce some $22 billion in revenue for America's several defense contractors. That makes this single defensive weapon system equal in value to about an entire year's worth of revenue at Raytheon (according to S&P Capital IQ data), and that's just in Europe. As missile threats continue to proliferate around the globe -- in North Korea, Iran, and elsewhere -- Aegis BMD will only get bigger.

For investors, this makes Aegis BMD one contract we definitely want to watch.


Ship-borne ballistic missile defense test-firing aboard the USS Hopper (DDG 70) near Hawaii. Photo: Wikimedia Commons.

The article Navy's Third Missile-Destroying Warship Arrives in Europe (Whom Will Russia Invade This Time?) originally appeared on Fool.com.

Fool contributorRich Smithowns shares of Raytheon. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 327 out of more than 75,000 rated members.The Motley Fool recommends Orbital ATK. 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.