Lockheed and Northrop Beat Out Boeing to Land Multibillion Dollar Pentagon Contract

Teams led by Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC) have won billions in new funding to work on a new missile defense interceptor program designed to protect the U.S. homeland from intercontinental ballistic threats.

The Pentagon’s Missile Defense Agency (MDA) has awarded an initial $1.6 billion to the two contractors, with more funding to come, selecting them over Boeing (NYSE:BA) to develop and demonstrate their concepts. The government wants the eventual Next Generation Interceptor (NGI) winner to design an all-new system, including booster and payload, that is able to launch from current infrastructure based in Alaska and California.

The Pentagon makes an aggressive push

Boeing’s exclusion is a disappointment, but in many ways the company lost this battle a long time ago. The company designed the current system now set to be replaced, and efforts by the Pentagon to work with Boeing to modernize that system were abandoned in 2019. That decision was a $5 billion blow to Boeing, and set the stage for this new competition.

Artist rendering of ballistic missiles launching.

Image source: Getty Images.

Future-proofing the eventual winner is a big factor in the decision to start from scratch, and in selecting two finalists for an extended bakeoff, the government is hoping to encourage the development of new technologies that will help keep the NGI relevant well into the next decade.

“By planning to carry two vendors through technology development, MDA will maximize the benefits of competition to deliver the most effective and reliable homeland defense missile to the warfighter as soon as possible,” Vice Adm. Jon Hill, director of the Missile Defense Agency, said in a statement. “Once fielded, this new homeland defense interceptor will be capable of defeating expected threat advances into the 2030s and beyond.”

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The contracts have a period of performance through 2029, meaning we aren’t likely to hear about a winner any time soon. But the potential payout is substantial: The U.S. Government Accountability Office estimates the Pentagon has spent more than $67 billion on the system the NGI will replace.

A who’s who of rocketry

The two winning teams have a lot of relevant experience in missile defense. Lockheed Martin is the lead contractor on the separate Terminal High Altitude Area Defense (THAAD) program, making interceptors designed to stop smaller short- and medium-range ballistic missiles.

Lockheed is working with propulsion specialist Aerojet Rocketdyne (NYSE:AJRD) on its bid. In December 2020, Lockheed agreed to acquire Aerojet for $4.4 billion with just these sorts of projects in mind.

“We are excited and proud the MDA entrusted Lockheed Martin to lead the development of this game-changing system that will greatly improve our nation’s security for decades to come,” said Sarah Reeves, vice president of the next generation interceptor program at Lockheed Martin. “We have been working toward supporting never-fail missions such as NGI for decades, and our team has the expertise and shared vision required to deliver on the MDA’s need to evolve” the current system.

Northrop, meanwhile, won a massive $80 billion award last year to replace the nation’s aging arsenal of intercontinental ballistic missiles. Northrop is working closely with Raytheon Technologies (NYSE:RTX) on the NGI bid. Combined, the two parties provide the interceptor booster, kill vehicle, ground systems, fire control, and engagement coordination on the current Boeing-led system that is to be replaced.

“There is a critical timeline for fielding this capability and our team brings together the industry’s top missile defense talent, agile design and manufacturing practices, and state-of-the-art operational factories to support the MDA and our nation’s defense against these evolving threats,” Scott Lehr, Northrop’s vice president and general manager for launch and missile defense, said in a statement.

Northrop owns its own propulsion specialist, having acquired Orbital ATK in 2018. Boeing has complained in the past the close ties between Northrop and Orbital provide an unfair advantage in these contests, withdrawing from the ICBM competition under protest. It’s unclear whether Boeing has similar issues with this procurement, though the company could choose to protest the award and delay implementation.

There is a compounding effect to these awards

There is no quick payday decision here, but make no mistake: These awards are very important to the defense contractors involved. Lockheed, Northrop, and Raytheon will be able to do years of government-funded research into high-tech sensors, propulsion systems, and warheads that will contribute both to their final designs on the NGI program and countless other potential bids.

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The ability to fire next-generation weapons, and the ability to counter weapons fired by adversaries, at high speed is a key priority for the Pentagon and should be a reliable source of procurement funds for the foreseeable future.

It’s dangerous to read too much into any one contract award, but the NGI decision does reinforce the perception that Lockheed Martin, Northrop Grumman, and Raytheon are the names to beat in the rocket race. For Boeing, a company that has dealt with more than its share of setbacks in recent years, the government’s NGI award is yet another disappointment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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