Prepare to Be Wowed by Lockheed Martin's Huge New Contract

By Markets Fool.com


Lockheed Martin's C-130 sales are taking off. Image source: Getty Images.

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Lockheed Martin (NYSE: LMT) shoots, Lockheed Martin scores -- big time.

Late last week, in one of the largest Pentagon contracts awarded in recent memory, the U.S. Air Force handed Lockheed Martin a contract worth $10.02 billionfor the production of its popular C-130J Super Hercules transport aircraft.

And no, that's not a typo.

What the Air Force will get

The Air Force describesthat number as "a cumulative ceiling to cover all future delivery orders within scope of this contract," which is rather circular language, but here's what it appears to mean: The Air Force intends to buy quite a lot of Lockheed's C-130Js, although the precise number is not yet known -- nor is it known precisely when it will be buying the planes. Thus, this type of contract is referred to a "indefinite delivery/indefinite quantity," or IDIQ.

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What is known is that the Air Force intends to spend as much as $10.02 billion on C-130Js through Aug. 18, 2026 -- so, 10 years from now.

And what will the Air Force get for all this money? According to the data crunchers at BGA-Aeroweb, the flyaway cost on a Lockheed Martin C-130J is currently $68.12 million. At that price, the Air Force appears to anticipate buying as many as 147 C-130s -- about 15% of the number of C-130 aircraft in service in all the militaries around the globe today.

What it means to investors

Winning this amount of orders for its mature -- and profitable -- C-130 program is simply a huge deal for Lockheed Martin. (The Air Force's enthusiasm for the platform may be explained, in part, by its plans to convert some C-130s into flying laser gunships.) But what does it mean for Lockheed Martin shareholders, in dollars and cents?

Well, putting aside questions relating to conversion of the C-130 to offensive uses (and the cost of such conversions), and focusing on the plane just as it is configured today, here's what we know:

Lockheed Martin produces C-130 transports within its aeronautics division, the company's largest by revenue according to data from S&P Global Market Intelligence. Aeronautics is also one of Lockheed's more profitable business units, boasting an operating profit margin of 10.7%. At a minimum, therefore, a maxing out by the Air Force of its C-130J orders should produce profits on the order of $1.1 billion for Lockheed Martin -- or about $3.65 per share. Even spread out over the next 10 years, that's a considerable sum.

In fact, these sales could be even more profitable for Lockheed Martin. We know this because, in past earnings commentary, Lockheed has implied that its C-130 program produces an above-average profit marginfor the company. Indeed, at one point in mid-2014, the company appeared to blame a slowing pace of C-130 sales for reducing profits in its aeronautics division by 10% -- and later credited an uptick in C-130 sales in the fourth quarter with helping to liftthe company's profit margin back up again.

Result: $1.1 billion in profits from this C-130 sale could turn out to be a lowball estimate. The final tally could be even higher. It may take as many as 10 years for us to find out exactly how many aircraft the Air Force orders, so that we can gauge the final value of the contract. But once we do... prepare to be wowed.

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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. 301 out of more than 75,000 rated members.

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