Lockheed Martin Experiences Significant Setback with Billion-Dollar Contract, Yet Maintains Optimism
Don't act surprised if I call you out later.
In June, I brought up the Pentagon's alteration in its plans for the Space Based Infrared System (SBIRS) - a fleet of substantial five-ton early warning missile detection satellites circling Earth in polar and geostationary orbits - which posed a risk to the space ventures of both Lockheed Martin (LMT -0.39%) and Northrop Grumman (NOC -0.31%).
Both corporations had previously secured multibillion-dollar assignments to manufacture and launch these satellites, but the Pentagon decided to decrease its order with Lockheed Martin from three satellites to merely two.
Although this might not seem like a significant change, given the high cost of these satellites, it allegedly cost the defense titan approximately $4 billion in expected revenues. What made this cut even more detrimental was the Pentagon's decision to diminish the order size: Smaller satellites with lower prices are replacing larger satellites with colossal price tags.
Why small satellites hold substantial interest for investors
This transformation has been in the works for nearly a decade. Back in 2016, I got my first hint of this transition when an interview with Vector Space Systems' then-CEO Jim Cantrell showed how affordable small satellites had become. In contrast to Lockheed's SBIRS satellites, which cost around $4 billion each, Cantrell highlighted that he was developing a small rocket capable of economically launching smaller satellites at just $25,000 per unit.
Admittedly, that price was for a basic satellite with limited capabilities - and an outdated figure at that. However, in a recent conversation with Firefly Aerospace CEO Jason Kim, I discovered that even more advanced satellites, capable of detecting missile launches, for example, and weighing up to half a ton rather than a few pounds, could now be built at an affordable cost between $15 million and $50 million.
A significant difference from $4 billion.
The problems with large satellites
Beyond their relatively minimal price tags, small satellites have another advantage over big satellites: it would be much harder for an adversary to disrupt a large number of smaller satellites than a single large one. And with several hostile nations developing anti-satellite weapons, this is a crucial factor for the Pentagon: Its latest and most advanced missile defense system, the Proliferated Warfighter Space Architecture (PWSA), is specifically designed around the principle of deploying hundreds of small satellites for a cost equivalent to just one big one.
Moreover, the Pentagon is not the only entity recognizing the benefits of small satellites. As Reuters reported recently, U.S. ally Australia threw away a multibillion-dollar single-orbit military satellite project with Lockheed Martin. The Australian Defense Department explicitly stated that it would opt for a multi-orbit system involving numerous small satellites rather than a solitary big one.
The contract in question, valued at $5 billion according to SpaceNews, would have placed a single communications satellite in orbit initially, with the potential for the system to eventually expand to a constellation of three to five satellites. That could have represented as much as $20 billion in revenue for Lockheed Martin. Based on Lockheed's space division's 8.9% operating profit margin, that would have generated almost $1.8 billion in profit.
However, Lockheed will receive none of it now.
The optimistic outlook
Or maybe it won't? As mentioned, in the U.S., the trend is shifting towards launching dozens or even hundreds of smaller and more affordable satellites instead of a few billion-dollar-plus ones. But Lockheed Martin does manufacture small satellites, too.
In fact, after purchasing subcontractor and satellite-builder Terran Orbital for a bargain price in August, Lockheed Martin is currently in a better position than ever to bid for the contract for whatever small-satellite communications system Australia wants. While Lockheed probably wouldn't be paid as much for this work as it would have for the large-satellite communications system Australia no longer wants, it would need to sell 250 small satellites at $20 million apiece to make up for the lost revenue from one large-satellite order.
Obtaining that business would at least lessen the pain of losing the big contract.
Lockheed Martin's primary concern at this stage should be to price its next bid correctly, lest it lose out to Rocket Lab (RKLB 8.15%) - a formidable maker of small satellites and small rockets in its own right, located right next door to Australia in New Zealand.
In the realm of finance and investing, this shift towards smaller satellites presents a significant opportunity for companies involved in their manufacturing and launch. For instance, Lockheed Martin's acquisition of Terran Orbital positions it well to bid on contracts for small-satellite communication systems, potentially mitigating the financial impact of losing larger contracts.
Given the advantages of smaller satellites, such as their lower cost and resistance to disruption, investing in companies that specialize in their production could be a wise financial decision. This is evident in Australia's decision to opt for a multi-orbit system involving numerous small satellites instead of a solitary large one, signaling a trend towards more affordable and resilient space ventures.
