Forget About the Iran War. Threats from Russia and China Just Won Lockheed Martin a $1.1 Billion HIMARS Contract.

The U.S. war against Iran continues to dominate headlines, even though it’s apparently currently in ceasefire mode (aside from the occasional naval blockade or counterblockade). Two months into the conflict, with the guns having finally ceased blazing, Pentagon Comptroller Jay Hurst told Congress last week that the war cost U.S. taxpayers $25 billion.

(This sounds like a lot, but it’s actually a whole lot less than the $80 billion to $100 billion _The Washington Post _estimated last month, and much, _much _less than the $8 trillion spent to fund the 20-year-long Global War on Terror (GWoT.)

So is this the end? Just $25 billion and done? Or will peace talks fall apart and the Mideast conflict revive?

No one really knows. But even with the Iran question still up in the air, the U.S. and its allies are already moving on to worry about the next big threat from Russia, and also from China.

Image source: Getty Images.

Danger beyond the Middle East

In evidence of which, see a recent list of defense contracts awarded by the Pentagon, described in the April 29 daily digest from the U.S. Department of Defense. The headline sale in this announcement discussed a $1.1 billion deal with Lockheed Martin (LMT 1.15%) to produce High Mobility Artillery Rocket Systems (HIMARS) M142 launchers.

In December, the U.S. Defense Security Cooperation Agency (DSCA) notified Congress of a pending sale of 82 HIMARS to Taiwan. Including ammunition in the form of the M57 Army Tactical Missile System (ATACMS), M31A2 Guided Multiple Launch Rocket System-Unitary pods (GMLRS-U), and other weapons, the total sale was valued at $4 billion. This new contract, announced in April, appears smaller in size at 17 HIMARS, and will include sales to the U.S. Army and U.S. Marine Corps, and also several foreign buyers – Australia, Canada, Estonia, Sweden, and Taiwan.

None of these countries, you may notice, is located in the Middle East. So why are Australia and Taiwan buying HIMARS? The logical conclusion is that they’re buying to hedge against potential aggression from China. And what about Canada, Estonia, and Sweden?

Because of Russia (most likely).

This may be an important dynamic for investors to keep in mind as the Iran war winds down. Already, military minds – and Pentagon dollars – are shifting back to address larger threats and the weapons systems that might mitigate them.

What’s more, 17 HIMARS sales are probably just the beginning. Reporting on the story last week, Canada’s CBC pointed out that Canada has actually expressed interest in buying 26 HIMARS systems – more than the entire number being manufactured under the just-announced Lockheed contract. And don’t forget the Taiwan order for _82 _HIMARS. Looking further back, in September, DSCA advised Congress of an Australian request for 48 HIMARS systems.

Expand

NYSE: LMT

Lockheed Martin

Today’s Change

(-1.15%) $-5.90

Current Price

$506.51

Key Data Points

Market Cap

$117B

Day’s Range

$504.50 - $512.00

52wk Range

$410.11 - $692.00

Volume

1.3M

Avg Vol

1.6M

Gross Margin

10.70%

Dividend Yield

2.67%

A whole lot of HIMARS – and a whole lot of profit

That’s a whole lot of HIMARS sales for Lockheed Martin. But what does it all mean for Lockheed Martin stock?

Lockheed locates HIMARS sales within its Missiles and Fire Control (MFC) division. That’s the company’s second-smallest of four main divisions in dollar terms, but also currently its most profitable in terms of how much profit one dollar of sales earns. Generating only $15.3 billion in sales last year, according to data from S&P Global Market Intelligence, MFC earned nearly as much operating profit ($2 billion) as the company’s better-known Aeronautics division did ($2.1 billion) – despite Aeronautics booking nearly twice as many sales ($30.6 billion).

Result: MFC earned a 13% operating profit margin, versus just a 6.8% margin for the division that produces the F-35 fighter jet.

On a $1.1 billion HIMARS sale, that works out to an extra $143 million in operating profit for Lockheed. Even spread across a share count of 230.6 million, that’s already a not-insignificant $0.62 boost to per-sahre operating progit. And with the prospect of many more HIMARS sales coming after these 17 are shipped, HIMARS might even move the needle on a stock as big as Lockheed Martin.

With a 25 P/E ratio, an 18.5% long-term forecast earnings growth rate, and a generous 2.7% dividend yield, Lockheed stock looks priced to move.