The Air Force Asked L3Harris: Can You Build Us a Fighter Plane for Less Than $50 Million?

Quick. If I ask which American defense companies build fighter planes, what names come first to mind?

Lockheed Martin (NYSE: LMT), I'll bet, maker of the F-16 Falcon, the F-22 Raptor, and the F-35 Lightning II. Boeing (NYSE: BA), too, probably, with its F-15 Strike Eagles and F/A-18 Hornets. You almost certainly do not think of L3Harris (NYSE: LHX), which is best known for producing radios, sensors, and (since acquiring Aerojet Rocketdyne) rocket engines.

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And yet, it turns out that the Air Force's newest fighter plane is built by -- you guessed it -- L3Harris.

(Re)introducing the A-1 Skyraider

The U.S. Special Operations Command (SOCOM) awarded L3Harris a $3 billion contract in 2022 to deliver 75 modified Air Tractor AT-802U Sky Warden turboprop aircraft. SOCOM plans to use these single-engine, fixed-wing, heavily armored fighter planes to provide "close air support, precision strike, armed intelligence, surveillance and reconnaissance (ISR), strike coordination and forward air controller" missions in uncontested air environments. Essentially, the planes were to take over the kinds of roles played by A-10 Warthog fighter jets in Afghanistan and Iraq.

Amazingly, the contracted price of the planes implies each of the new fighters will cost as little as $40 million, or less than half the cost of a Lockheed Martin F-35.

But what would these planes look like when finished? And what would they be called? The answers to these questions came just last week, when the U.S. Air Force announced it will rename its OA-1K to "armed overwatch" concept the "Skyraider II."

An homage to the A-1 Skyraiders that performed close air support missions in Korea and Vietnam, the newly named Skyraider II is based on a civilian crop duster design, and is designed to operate out of unimproved airfields with short runways. USAF is still working out precisely what weapons it wants on the Skyraider II, with everything from 2.75-inch Advanced Precision Kill Weapon System rockets to Hellfire missiles to Joint Air-to-Surface Standoff Missiles and Harpoon anti-ship missiles under consideration, making the plane sound like a Swiss army knife of capabilities. However configured, the plane will be able to carry up to 6,000 pounds of ordnance -- roughly equivalent to the internal load capacity of an F-35.

When does the money start rolling in?

Since the original contract was awarded, the Air Force has had to pare back its order to just 62 planes. Even so, the $3 billion target price implies a per-plane price of less than $50 million -- $48.4 million to be precise.

FlightGlobal reports the defense company has already built the first two Skyraiders, and will begin delivering "operationally configured" planes early this year. AirAndSpaceForces.com says the Air Force plans to buy roughly one dozen planes in each of 2025, 2026, and 2027. National Defense Magazine notes that L3Harris will deliver enough Skyraiders to form a squadron by 2026.

Full operational capability probably won't arrive until 2029. Still, this schedule implies that the Skyraider II program could generate as much as $580 million in incremental revenue for L3Harris as early as this year. According to S&P Global Market Intelligence data, that's only 2.7% of annual revenue for the company, but it's still perhaps enough to move the needle a bit.

Is L3Harris stock a buy?

What makes the Skyraider II program perhaps an even bigger opportunity for L3Harris, though, is its potential to expand beyond SOCOM, and beyond the U.S. Intriguingly, FlightGlobal notes that no fewer than 22 "potential overseas buyers" have already expressed interest in buying the new plane for their own air forces, and another 15 countries are considering doing so.

That's nearly 20% of countries in the world, and for a plane that hasn't even entered full-scale production yet. So it kind of sounds like L3Harris has a hit on its hands.

Still, investors shouldn't get too irrationally exuberant. Even if Skyraider turns out to be a very popular product, it unfortunately belongs to a very expensive defense stock. Priced at 28 times trailing earnings today, L3Harris would have to be growing midteens annually, percentage-wise, to make it any kind of a buy. Most analysts who follow the stock, however, think L3Harris will struggle to grow earnings much faster than 7% annually over the next five years.

If that's the best growth L3Harris can muster, I fear, the stock remains a sell, Skyraider or no Skyraider.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends L3Harris Technologies. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.