Humvee Replacement Holds Massive Sales Potential

Includes: F, GD, LMT, NAV, OSK
by: Matthew Potter

The U.S. military will still need to invest in important upgrades and new equipment even as it winds down the fighting in Iraq and Afghanistan and reduces defense spending overall. Some new technology, such as unmanned aerial vehicles, will see increased spending while cuts are made to existing and planned weapon systems and the overall size of the military.

One program that has become a priority is the joint light tactical vehicle (JLTV), which is a fancy name for the replacement to the ubiquitous Humvee. That truck in turn replaced the famous Jeep of World War II fame. The JLTV is an important program to the winning bidder due to the sheer size of the fleet needing replacement.

The Humvee has been in service now for almost thirty years. It suffered on the battlefields of Southwest Asia because it did not offer enough protection against the biggest threats: mines and improvised explosive devices. This was not due to any specific fault of the system, but rather the fact that there was no real armor requirement for this vehicle.

The Humvee has been made by AMG General since its introduction. The JLTV, on the other hand, will be required to be larger, more powerful and able to integrate improved armor and weapons. Unlike the Humvee vehicles, which saw attempts to add more protection and systems like the Crew Remotely-Operated Weapons System in at time haphazard response to combat conditions, the JLTV will be designed from the ground up to meet severe threat requirements.

The program entered a new stage this week with companies and teams submitting their proposed solutions for the engineering, manufacturing and development phase. This means that the different designs will be judged by the U.S. Army and one or more will go into production. The U.S. military did well with a similar competition for a light Mine Resistant Ambush Protected vehicle for use in Afghanistan, won by Oshkosh (NYSE:OSK), which saw a "drive off" leading to billions in order for the winner.

Five different proposals were submitted for this next phase of the multibillion-dollar program. A team of Ford (NYSE:F) and U.K. defense giant BAE Systems (BAE) sent in a proposal, as did BAE Systems' former partner, Navistar (NYSE:NAV). Oshkosh also submitted based on components of their MRAP-AT design used in Afghanistan.

Other teams submitting proposals included the largest U.S. defense contractor Lockheed Martin (NYSE:LMT) as well as a team of General Dynamics (NYSE:GD) and AMG General. AMG had to bid as its core business is the Humvee and the company would be a natural choice to replace it.

The size of the program, with over 50,000 vehicles planned to be built along with production for foreign customers and the support and modernization of the delivered vehicles, means that this will be one of the largest long-term defense contracts of this decade. The winner, or winners, will see a large amount of revenue and substantial earnings from the program.

Due to concerns from the DoD about price, it can be expected that the winner will be one of the teams offering a low price to meet the necessary requirements. This will put pressure on earnings despite the expected revenue, as Oshkosh found out with its win of the Army's tactical truck contract from BAE Systems. Profits are limited due to the need to bid a very low price and manage costs. The JLTV program could certainly be similar to this experience.

Even so, the winner of the two-year-plus contest will get one of the few, large contracts the U.S. can afford to award in the near future, and it will certainly aid it in prospering compared to some of its competitors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.