On August 3, the Pentagon inked a more than $3 billion deal with Lockheed Martin Corporation (NYSE:LMT) and Northrop Grumman Corporation (NYSE:NOC) to boost the production of Patriot and THAAD interceptor missile parts. The development comes as the conflict in Iran intensifies and the Ukraine war rages on, straining stockpiles. The Centre for Strategic and International Studies recently estimated that the U.S. military was left with less than 1,000 Patriot interceptors and under 250 THAAD interceptors on hand.
The deal includes a $2 billion framework agreement to accelerate the production of PAC-3 MSE by providing critical components and a $1 billion agreement to expand the monthly supply of THAAD components over seven years, Northrop said in a press release. The contract type was not disclosed. The development establishes the defense contractor as the second source supplier of solid rocket motors for the PAC-3 MSE.
According to the Pentagon's press release, the framework aims at tripling the production of Patriots and quadrupling THAAD output. This follows last week's announcement of a $58.6 billion contract for Lockheed Martin Corporation (NYSE:LMT) to produce Patriot interceptor missiles. The agreement has reinforced the PAC-3 interceptor's status as a significant pillar of multi-year growth for Lockheed Martin Corporation (NYSE:LMT).
It also adds fresh visibility into the defense contractor's backlog, which reached a record $230 billion at the end of the second quarter. Moreover, having a new second source of solid rocket motors will help in easing the delivery bottleneck for the company as it targets the planned output expansion. For Northrop Grumman Corporation (NYSE:NOC), the PAC-3 agreement provides a new revenue stream, which can act as a growth driver amid investor concerns regarding core program margins.
On the other hand, the THAAD contract builds on an established role, considering that Northrop has been providing the missile defense system with critical expertise related to aft bulkheads, interceptor shell cores, and heat shield assemblies since 2002. Lockheed Martin Corporation (NYSE:LMT) remains the primary defense contractor for the PAC-3. It could face schedule risk if Northrop faces ramp-up delays.
This is a new dependency that did not exist before. Furthermore, the demand is a reaction to depleting stockpiles, instead of being driven by a growing addressable market. This raises questions about the durability of growth, as a de-escalation in either Ukraine or the Middle East could result in reduced urgency to procure these weapons.
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