Lockheed Martin And Oshkosh Stand To Gain As Pentagon Takes Next Step In Humvee Replacement

Includes: LSE, OSK
by: Matthew Potter

The Department of Defense is continuing, despite the upcoming budget issues, with planning for a new vehicle that will replace the ubiquitous HUMVEE. The HUMVEE in turn had replaced the Jeep in the eighties and has been built in the thousands since. AM General, a privately-owned company, is the prime contractor for the HUMVEE. In recent budgets, the amount being purchased each year has fallen off, mainly as the Army has built enough to meet its needs.

The new Joint Light Tactical Vehicle (JLTV) will be broadly similar to the HUMVEE, but will take into account the lessons from the last decade of fighting in Iraq and Afghanistan. This means it will be more maneuverable and armored with a focus on defeating Improvised Explosive Devices (IED) and mines. If the program goes forward, there will be a requirement to build thousands of trucks to replace the many HUMVEE's in use by all the U.S. services as well as many allies across the globe.

In March, five different corporations and teams submitted proposals to be considered for the Engineering, Manufacturing and Development (EMD) phase of the program. The Pentagon intended to select two or more of these for further test and development. Then at the end of that phase, one design would be selected to go into production. This is similar to the process used to choose a Mine Resistant Ambush Protected (MRAP) vehicle for use in Afghanistan, won by Oshkosh (NYSE:OSK), which saw a "drive off" leading to billions in orders.

Last week, the winners were announced for entry into EMD. These were the proposals provided by Lockheed Martin (NYSE:LMT), Oshkosh and AM General. This meant those by the team of Ford (NYSE:F) and BAE Systems (OTCPK:BAESF) and the one from Navistar (NYSE:NAV) were not chosen.

The initial contracts have a value of $55-65 million and will start the 24 month process to get to the production decision in the Fiscal Year 2015-2016 time frame. The goal is to do testing and refinements so that one of the designs will be placed into production.

Ford, BAE Systems and Navistar do have the opportunity to protest the decisions by the government. This would lead to a review by the General Accountability Office (GAO) of how the winners were chosen. If the protests are upheld, which is normally about a three-month process, then the Army could be told to re-evaluate the proposals, have a new contest or, in the rarest case, have to accept one of the losing proposals. If the GAO denies the protest, then the program will continue as currently planned. While a protest is ongoing, the contracts must be placed on hold. Protests should be filed by the end of August based on the award date.

The company with the most to lose is AM General as they would see their primary product line end. Navistar too has suffered a blow by not being considered for the program. They had been able to supply MRAP vehicles to the U.S. military during the peaks of fighting, but that market has significantly declined as quantity requirements have been reached. BAE Systems has already lost its contracts to produce trucks for the U.S. military when Oshkosh four years ago won that contract.

If the program remains fully funded and executes as planned, the winner could eventually see up to 50,000 or more of the JLTV built. They would also get contracts to provide maintenance, spare parts and support foreign customers. Sales could be worth billions over the next few decades. The JLTV would be one of the largest defense programs during that time.

That the EMD contracts were awarded is a good sign that the U.S. is going to move forward and begin the process of replacing the HUMVEE even with the potential for the large cuts caused by sequestration. The production contract would provide the winner a significant amount of their revenue and earnings each year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.