2018. What a year.
It's been nearly 12 months since the great "Hawaii false missile alert" happened. On Jan. 13, at 8:07 a.m. local time, Hawaii's Emergency Management Agency mistakenly broadcast a warning about an incoming ballistic missile threat. Recipients might have been inclined to disregard the warning as a mere drill -- but for the fact that the alert specifically urged them to understand that "this is not a drill." Panic erupted across the islands, alongside calls for beefed-up missile defense in the U.S. Senate.
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12 months later, that's starting to happen.
Lockheed Martin to the rescue
Earlier this month, in a publicly disclosed contracts update, the Pentagon announced that it has awarded Lockheed Martin (NYSE: LMT) $585.2 million to "design, develop, and deliver" a "Homeland Defense Radar-Hawaii (HDR-H)" system to ensure "autonomous acquisition and persistent precision tracking and discrimination to optimize the defensive capability of the Ballistic Missile Defense System (BMDS) and counter evolving threats."
In a press release responding to the award, Lockheed Martin clarified that it will utilize its Long Range Discrimination Radar (LRDR), currently under construction in Clear, Alaska, and expected to go online in 2020, "to provide the lowest risk and best value HDR-H solution to [the U.S. Missile Defense Agency]" in Hawaii as well. HDR-H is to be built on the island of Oahu by the end of 2023.
Once both are ready, LRDR and HDR-H will be incorporated into Lockheed's Ballistic Missile Defense System (BMDS), incorporating both shipborne and "Aegis Ashore" elements. In this way, Lockheed and the Pentagon will respond to Hawaii Congresswoman Tulsi Gabbard's demand that the military put "a missile defense system in place in Hawaii to defend Hawaii."
What this contract means to investors
Hawaiians should be happy to hear that. Lockheed Martin investors should be pretty pleased, too. Thanks to Hawaii's Emergency Management Agency snafu, their company is about to be gifted $585 million in extra revenue that might otherwise never have been awarded.
Granted, for a business as big as Lockheed Martin, with $51 billion in annual revenue, even a half-billion dollars won't really move the needle very much. This entire contract, spread over five years of performance, will amount to barely 0.2% of the company's annual business. Still, there are at least a couple reasons investors might want to pay attention to it.
The first is because Lockheed's HDR-H contract will fall under the ambit of the company's Missiles and Fire Control (MFC) business. Although Lockheed's smallest unit by revenues ($7.6 billion in revenue last year), MFC is Lockheed's most profitable business unit by far. In 2017, MFC earned a whopping 13.9% operating profit margin for Lockheed, 320 basis points better than Lockheed's flagship Aeronautics business earns and 230 basis points better than Lockheed's overall, companywide profit margin.
Those extra points of margin could become even more important if the Pentagon decides to expand its investments in missile defense in the future. Lockheed notes that it is designing LRDR and HDR-H with an "open, scalable architecture for future growth." This suggests the company has hopes of winning additional missile defense awards of a type similar to HDR-H -- and, presumably, at similar profit margins. With Lockheed Martin stock currently trading for a rich 24 times earnings -- earnings that, according to data from S&P Global Market Intelligence, are little better than what the company was earning five years ago -- every little bit of extra revenue helps.
And the bigger the profit margins on those revenues, the better.
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