RTX Bags a $5 Billion Missile Order. Is This The Solution to America's Drone Problem?

Key Points

• The U.S. Army will buy $5 billion worth of Coyote missiles from RTX through 2033.

• At $100,000 per missile, that's 50,000 drones to be supplied over eight years.

• RTX stands to earn a profit of nearly $500 million on the contract.

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How much does the U.S. Army love its drones? Let me count the ways -- all $5 billion of them.

Last week, in a development I can only call stunning, the Department of Defense, which the Trump administration is repositioning as the Department of War, announced it will buy $5 billion worth of "Fixed, Mobile Coyote Missile Launchers, Kinetic and Non-Kinetic Interceptors, and Ku-band radio frequency system radars" from the Raytheon division of RTX (NYSE: RTX).

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It's the single largest order for drones I have ever seen from the U.S. military.

This contract implies wholesale adoption by the U.S. Army of Raytheon's Coyote missile, which the company describes as a "rail-launched missile variant with a boost rocket motor and a turbine engine for high-speed counter-unmanned aircraft system (C-UAS) and launched effects (LE) missions." Roughly 2 feet long, and weighing just 13 pounds -- but with a 9-mile range and an airspeed of more than 300 mph -- the Coyote is similar in size to the drones it aims to defeat. In fact, the Coyote can itself be thought of as a drone -- useful both for defensive against hostile drones and for offensive attacks, as well as for surveillance missions.

According to the defense giant, there are even Coyote variants that can conduct electronic warfare or function as airborne communications relays.

Image source: RTX.

Coyote drone versus enemy drone

But it's the Coyote's drone defense characteristics (known as counter-unmanned aerial systems, or C-UAS) that interest us today. Because Coyote, you see, just might provide a solution to America's drone problem.

Recently, both Ukraine and Israel have been compelled to defend themselves against cheap attack drones launched by Russia and Iran, respectively. Cheap drones also bedevil U.S. forces in the Red Sea, where Houthi fighters have launched them at international shipping, and at the U.S. Navy vessels defending these civilian ships.

Going by names such as Geran and Shahed, these low-cost drones generally fly relatively slowly -- just 115 mph or so -- but boast ranges of 1,200 miles and up, and can carry warheads of 110 pounds and more. Importantly, they cost as little as $50,000 each. Yet U.S. and allied defenders most commonly have been trying to shoot them down with high-priced anti-aircraft missiles -- generally, Standard Missile-2 (SM-2) interceptors that cost $2.1 million.

You can see why that's a problem. If the missiles that U.S. forces are using to shoot down drones cost 42 times more than the drones they're shooting down, the U.S. will lose the war of economics pretty quickly. But RTX's Coyote can help to solve that problem.

Because Coyote is reported to cost only $100,000.

What this contract means for America, and for RTX

Admittedly, shooting down $50,000 drones with $100,000 missiles still isn't ideal from a cost-parity perspective. But it's a whole lot better than using $2.1 million missiles to do it.

For this reason, I view the Army's decision to sink $5 billion into Coyote purchases as a decision to invest in a good enough solution to its problem. And it buys the Pentagon some time to come up with a true solution -- namely, an interceptor that costs less than the drones it's intercepting. Time to negotiate drone co-production agreements with the Ukrainian companies that are quickly becoming world leaders in the development and production of low-cost drone interceptors for air defense. Time to allow RTX, or other defense tech start-ups such as Anduril Industries, to spin up their drone businesses and come up with even cheaper solutions than the Coyote.

In the meantime, the contract is pretty good news for RTX and for its shareholders. According to data from S&P Global Market Intelligence, drones sold through RTX's Raytheon defense business earn about a 9.7% operating profit margin. That's not quite as good as RTX's overall 10.7% operating profit margin, but it's not bad at all. It suggests the $5 billion Coyote sale could earn RTX as much as $485 million in total profit.

Still, investors shouldn't get too excited about that number. According to the contract, Coyote deliveries will stretch out over eight years, through late September 2033. So over the length of the contract, we're probably only talking about $61 million or so in incremental profit added to RTX's income annually. That should amount to a modest 1% increase to the $6.1 billion that RTX already earns each year.

It's better than nothing, though -- for RTX, and for the U.S. Army as well.

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