Is the U.S. Army Really Spending $12.7 Billion on Radios?

By Markets Fool.com


Harris Corp's Falcon III AN/PRC-158 Manpack radio. It may not look like much -- until you see the price tag. Image source: Harris Corp.

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The U.S. government spends a lot of money on weapons. So much money, in fact, that sometimes, you see a number and think, "That can't be right. But then again, maybe."

I had one of those moments last week, when the Department of Defense reported that it had just awarded three contractors a $12.7 billion contract to supply it with radios. That number couldn't be right. And in fact, since the exact dollar figure on the contract read "$12,725,724,536," I thought it was more likely a typo. Someone was data-entering the number for a $12.7 million radio contract, mistyped the "thousands" place, retyped it, and forgot to delete the original entry.

But it wasn't a typo.

And the Pentagon really is spending $12.7 billion on radios.

$500 toilet seats are so 1980s
That's a whole lot of moola to spend on what's likely to work out to about 65,000 radios -- roughly $200,000 per set. Granted, the value of the award also includes the cost of "accessories and related services" relevant to the radios. But even so, let's put that $200,000 number in context.

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Each of these man-portable radio sets will cost about as much as a brand new 2016 Mercedes Maybach S600.


Image source: Mercedes-Benz.

So what will the Pentagon be getting for its $200,000? Awardee Harris Corp (NYSE: HRS) explains that the "Harris AN/PRC-158 multichannel" radio features "two-channel architecture and integrated cross-banding" covering the SRW (Soldier Radio Waveform), SINCGARS (Single Channel Ground and Airborne Radio System) and the ultra high frequency MUOS (Mobile User Objective System) SATCOM waveform, "while maintaining backward interoperability with legacy waveforms."

In other words, these radios, each "manpackable" -- or small enough to be carried by one man -- will cover "the full 30-2500 MHz frequency range" utilized by the Army, including frequencies used for "top secret" communications. And they'll do it and "in a form factor 30% smaller than similar products." Harris says this will "provide more warfighting capabilities than previous generations of tactical radios."

That sounds pretty good. Is it Maybach good? Maybe -- but it's still a pretty high price.

Who gets the loot?
Of course, when you get right down to it, what interests investors most isn't the capabilities of the system -- the Pentagon already seems pretty pleased with those. What we really want to know is who will benefit from this contract, and how much?

In that regard, the three companies participating in this $12.7 billion, 10-year-long contract, are the aforementioned Harris Corp., as well asGeneral Dynamics (NYSE: GD) and Rockwell Collins (NYSE: COL). Assuming a roughly equal split in how much of the contract each company is ordered to fulfill, the deal will affect the companies very differently.

General Dynamics, the largest of the three firms at $31.5 billion in annual revenue, will see the least benefit from this deal. According to data from S&P Global Market Intelligence, GD's Information Systems and Technology business is the company's largest, but its second least profitable. And even an extra $472 million a year in radio business ($12.7 billion, divided among three contractors, and spread over 10 years) will boost GD IS&T revenues by less than 5%.

Rockwell Collins will do quite a bit better. The $5.2 billion-a-year company is the smallest of the Pentagon's three winners, but it's also very dependent on government work, with its "Government Systems" division accounting for nearly 42% of all revenues Rockwell Collins collects in a year. Rockwell makes very good revenues on this business -- nearly 21% operating profit margins -- and will profit nicely from the extra Pentagon business.

It's Harris Corp, however, that will benefit most of all. $472 million in extra annual revenue promises to grow the company's $1.8 billion annual Communications Systems business by more than 26%. And Harris earns superb operating profit margins on this business -- approaching 31% per revenue dollar. Operating profit from this one single contract could therefore be as much as $146 million a year, or nearly twice what Harris earned in all of 2015.

Long story short, if there's one single stock I'd expect to do best in the wake of this monster radio contract award, it's Harris Corporation. And the fact that the stock has moved hardly at all since the contract was announced? This is one Fool that thinks Harris is worthy of closer inspection.

The article Is the U.S. Army Really Spending $12.7 Billion on Radios? originally appeared on Fool.com.

Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 282 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.