Why Is the Pentagon Buying $12 Billion Worth of Bombs and Missiles From Boeing, Lockheed Martin, and RTX?

The Pentagon's fiscal year 2024 has come to an end. And just like the end of every year, the Pentagon ended with more of a bang than a whimper.

In contrast to the usual handful of contracts announced on an average day any other time of the year, the last few days of the Pentagon's fiscal year can see anywhere from dozens to more than a hundred contracts handed out in a single day.

Why?

Presumably, because the Pentagon has an annual budget, and if it doesn't spend its budget before the year is over, Congress might get the impression that it doesn't need as much money next fiscal year -- and might cut the budget.

This existential fear of an accidental budget cut causes the Pentagon to shovel contracts out the door as fast as it can as the deadline approaches. And this year, three of America's biggest defense stocks benefited mightily from this spending spree: Boeing (NYSE: BA), Lockheed Martin (NYSE: LMT), and RTX (NYSE: RTX).

$6.9 billion for Boeing

On Sept. 30, literally the last day of the fiscal year, Boeing landed a monster $6.9 billion order to supply small diameter bombs (SDB) to the U.S. Air Force.

The Air Force describes the SDB as a 250-pound guided air-to-surface munition that can be deployed by a variety of fighters and bombers, including the F-15E, F-22, F-35, and even by F-16s such are now being delivered to Ukraine. Perhaps not coincidentally, while most of these bombs are on order for the U.S. Air Force, Bulgaria, Japan, and Ukraine are also named as recipients in the Pentagon's contract announcement.

$3.6 billion for Lockheed Martin

Not to be left out of the Pentagon's largesse, Lockheed Martin won two missile contracts on the second-to-last day of the fiscal year. The larger contract, worth $3.2 billion, covers the supply of both joint air-to-surface standoff missiles (JASSM) and long-range anti-ship missiles (LRASM) to the U.S. Air Force and various U.S. allies (Finland, Japan, the Netherlands, and Poland).

The Air Force describes JASSM as a GPS/INS (that's internation navigation system -- useful when GPS is being jammed)-guided air-to-surface missile used primarily for air-to-ground use. Lockheed clarifies that LRASM is similar, and in fact derived from JASSM's design, but designed primarily to target ships at sea.

A separate contract announced on the same day, worth $358.4 million, relates solely to the supply of LRASM missiles, bringing total missile orders for the company to just under $3.6 billion.

$1.5 billion for RTX

Finally, RTX won three separate contracts worth $1.5 billion in total -- awarded on the same day as Lockheed's contracts.

RTX's biggest award, worth $736.6 million, covers the supply of more than 1,100 AIM-9X Sidewinder air-to-air missiles for the U.S. Navy, Air Force, Army, and for foreign allies. For $525.5 million, RTX will also supply Evolved Seasparrow air defense guided missiles for the U.S. Navy and American allies. Finally, RTX will receive $254.5 million for maintenance of standard missiles, also used for air defense.

Add it all up, and the total bill for all these bombs and missiles comes to a nice, round $12 billion.

What it means for investors

But which of these contracts is most significant from an investor's point of view? Your instinct might be to say, "Boeing, of course," because its $6.9 billion SDB contract is bigger than the five contracts won by Lockheed Martin and RTX combined -- but I think that would be a mistake.

The $6.9 billion SDB contract, you see, will be run through Boeing's Defense and Space business unit (BDS). It's a big contract, worth nearly 28% of that business's annual revenue. Problem is, BDS isn't currently profitable, and hasn't been for two years. As such, even $6.9 billion in revenue might not be enough to add value (i.e., earn a profit) for Boeing.

Contrast that with how even their smaller contracts would benefit the more consistently profitable defense businesses at Lockheed Martin and RTX. Lockheed's missiles and fire control (MFC) division earns the best operating profit margin of any of these defense contractors -- nearly 13% of the revenue it collects. According to data from S&P Global Market Intelligence, RTX earns less, about 9% margin at its Raytheon defense business. Applied to their respective missile contracts, this implies that RTX's contracts could result in about a 2% increase over 2023 operating profit, while Lockheed's earnings could grow 5%.

Admittedly, these numbers seem like small improvements in the context of the multibillion-dollar defense contracts the companies have just won. This just goes to show that it takes a lot of money to move the needle on businesses as big as Lockheed ($67.6 billion in 2023 revenue) and RTX ($68.9 billion). Still, in each case, at least the contracts will move the needle, and will add profit for investors.

Ultimately, this makes RTX stock a better bet than Boeing, and Lockheed Martin stock arguably the best choice of all.

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