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Lockheed Martin will triple Patriot missile production for the Pentagon.
More missile sales means more revenue, and probably at higher profit margins.
Lockheed Martin (NYSE: LMT) stock is hopping Tuesday morning, up 3.6% through 10:50 a.m. ET after announcing a "landmark" contract to supply the U.S. Department of Defense with PAC-3 Missile Segment Enhancement (MSE) interceptor missiles -- also known as the "Patriot."
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Image source: Getty Images.
"This transformative partnership," says Lockheed, will give the company enough guaranteed demand from its customer to enable the defense giant to profitably ramp Patriot missile production from approximately 600 missiles per year to 2,000 for the next seven years.
It gives Lockheed the "long-term demand certainty" it needs to justify making investments in production capacity. And as this translates into additional production, it will "drive operational efficiencies" that will lower the cost of each unit of output -- both for the customer and for Lockheed Martin itself.
What does this mean for Lockheed Martin, in dollars and cents?
Priced at $4.2 million per unit currently, PAC-3 MSE is a $2.5 billion franchise for Lockheed Martin at present. Although it seems implied that the increased production rates will yield lower prices for the customer, if one were to triple the production rate and hold the price constant, for example, that would grow to $8.4 billion annually.
Even for a company with more than $74 billion in annual sales, that's a significant increase, and enough to "move the needle" on Lockheed stock, I think. And granted, while the revenue bump might not be quite as large as I describe above, the fact that Lockheed anticipates "operational efficiencies" should at least mean improved profit margins (and profits) for Lockheed -- and in a missiles and fire control business segment that is already Lockheed's most profitable.
This is good news for Lockheed Martin stock, and today's price bump is justified.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.
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Trump's proposed $1.5 trillion defense budget sends military contractor shares higher
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