RTX May Bag a $4.2 Billion Big-Blimp Bonanza

Forget stealth fighter jets, drones, and orbital, Earth-observing spy satellites. If you ask the U.S. Army, the future of Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) may actually reside in... blimps.

Or at least they had better hope so.

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Earlier this month, the U.S. Pentagon announced it has awarded a $4.2 billion, 10-year contract to build "lighter than air systems, tethered systems, and elevated sensors" for the Army to a series of 10 different companies, working together and individually. Several of the names will be virtual unknowns to defense investors, privately held companies with names like Advanced Technology Systems Co, Elevated Technologies LLC, and Skyship Services Inc. Other names, however, will be more familiar:

Leidos (NYSE: LDOS) is one of those latter. Also Britain's QinetiQ. Most familiar of all, though, will be RTX Corp (NYSE: RTX) and TCOM Holdings, the two companies that began building Joint Land Attack Cruise Missile Defense Elevated Netted Sensor (JLENS) aerostats for the Army back in the mid-2010s.

What you need to know about JLENS

You probably remember JLENS even if the name doesn't quite ring a bell. In 2015, aerostat made headlines under the title "Raytheon's Wandering Blimp" when the aerostat broke free from its anchor at Aberdeen Proving Grounds in Maryland. The gigantic blimp began floating up and down the Eastern Seaboard, dragging its massive tether along the ground, taking down power lines and generally wreaking havoc until finally being shot down by Pennsylvanian policemen armed with shotguns.

"Pop!"

Suffice it to say the Army quickly put JLENS on the shelf after that incident, but nearly a decade later, JLENS resurfaced when the Polish military asked Congress to let it purchase $1.2 billion worth of aerostats to use for air and missile defense. RTX, TCOM, and QinetiQ were all named as vendors in the program. And now, one year later, here we are again with these names popping back up -- this time in a U.S. Army competition to sell nearly four times as many aerostats.

Image source: RTX Corp.

What is JLENS good for?

Late last year, I floated the idea (pun intended) that the U.S. military might want to revive JLENS as a way of keeping track of the strange surge of unidentified flying objects, believed to be hostile surveillance drones, that had been swarming over East Coast military bases and government installations for weeks.

Peering down from an altitude of 10,000 feet, JLENS has been described as able to detect and track "all fixed- and rotary-wing aircraft, unmanned aerial vehicles, and land attack cruise missiles," and even "surface moving targets, large caliber rockets, and tactical ballistic missiles," around "a 360-degree field of view" and "up to a range of 340 miles." That's in contrast to most ground-bound radar systems currently used by the military, which have trouble detecting drones flying too close to the ground, as reported in a recent 60 Minutes story on the drones crisis.

Were I to make an educated guess, I'd suspect this is a primary reason why the Army is preparing to spend $4.2 billion on aerostats today. Aerostats are also already in use along the U.S. southern border, however, where Customs and Border Protection uses them to monitor both aircraft and surface vehicles crossing over from Mexico and moving within the Gulf. The Army may be ordering more aerostats for this purpose as well.

And, of course, there's the Poland order for $1.2 billion. It's entirely possible that at least some of the $4.2 billion the Army is awarding to RTX Corp and the other aerostat companies will go to fund the production of aerostats that Poland will eventually pay for.

Will this move the needle on RTX stock?

One word of caution: Because the U.S. Army contract names RTX as just one of 10 companies bidding on contracts to build "lighter than air systems, tethered systems, and elevated sensors," it's possible other awardees will actually win some (or even all) of the monies on offer. I personally think it's much more likely, however, that the company that's been building aerostats for the Army from the beginning will win the lion's share of this work.

I'd further postulate that contracts awarded to RTX will run through the company's Raytheon threat-detection division, which according to data from S&P Global Market Intelligence earns a 9.7% operating profit margin on its revenue. If I'm right about this, then $4.2 billion times 0.097 implies RTX is now in the running to earn on the order of $400 million in incremental profit from this contract.

Granted, spread over 10 years, it's probably not enough to move the needle much on a company that already earns $8.6 billion in operating profit. But it's better than a sharp stick in the eye, so to speak -- which would also be hazardous to blimps.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends QinetiQ Group Plc and RTX. The Motley Fool has a disclosure policy.