The Military's Secret Weapon

I mentioned some time ago that a little Beltway birdie revealed to me the next series of fighter jets commissioned by the Pentagon won’t have pilots.

It’s futuristic for sure. But it shouldn’t be shocking.

The military-industrial complex can be credited with some of the most far-reaching — and most profitable — technological advances of our time. Digital photography, GPS, and the Internet come to mind…

And what they’re working on now promises to be just as beneficial and lucrative as those earlier inventions.

$218 Million a Pop

Even in the face of trillion dollar deficits, the military spends on…

A few weeks ago, as the debt ceiling debate raged, the U.S. Air Force and Navy quietly announced they would spend $23 billion on new surveillance drones.

Each one would have an MSRP of $218 million if parked on a dealer lot.

Of course, that $23 billion won’t all be spent at once.

Here’s how the most recent annual Pentagon budget request looks compared to last year:

A 14% increase overall. A 47% increase for predator drones — the ones that drop missiles on Pakistan. (Shhhh, that’s a secret.)

So that’s the nutshell version. The military is greatly expanding its use of drones, going so far as to ask for the “sustainment of maximum production” in its most recent budget request, which I broke down for you in the table above.

But how are we going to profit?

The Specifics

Here’s a snippet from the Economic Times article that first broke the $23 billion drone news:

Pentagon tests also suggested last fall that the new Air Force model was not reliable enough to provide sustained surveillance. Parts failed frequently, and the equipment for intercepting telephone and radio conversations, a vital requirement for replacing the U-2, had trouble pinpointing the source of the calls.

Pentagon officials and executives at Northrop Grumman, which is building the Global Hawk, say they are trimming costs and replacing the faulty parts. Since March, commanders have rushed nine of the planes into use over Japan, Libya and Afghanistan, and they say they have done a good job in taking images of the earthquake damage in Japan and bombing targets in the war zones.

Catch that? They need to “trim costs” and “replace faulty parts.” And I know just how they’re going to do it… and that is the key.

You could buy Northrop Grumman (NYSE: NOC), Lockheed (NYSE: LMT), or Boeing (NYSE: BA), all of which make drones in some form. But I wouldn’t; drone’s aren’t a big enough part of their businesses.

Instead, you’ll want to buy the smaller companies helping to trim those costs and replace the faulty parts.

My Beltway Birdie

Have you ever thought about the Hubble Space Telescope?

Me neither.

Have you ever thought about the arms and rods that hold its parts in place, that make sure its lenses don’t vibrate as it’s hurling through space taking flawless (digital!) photos?

I didn’t think so.

But there are engineers and scientists who ponder that stuff religiously. I know because I’ve met them…

I’ve met the man who built the metal latticework on which the Hubble’s mirrors rest.

That part cost tens of thousands of dollars. It was made from a beryllium alloy, one of the lightest and strongest metals known to man.

NASA and aerospace companies use it for that reason. It costs $10,000 per pound to put something into space; when beryllium is used — though it costs more — the weight savings pay for themselves.

I’ve picked up specialty beryllium parts that look like they should weigh a ton… with a single finger!

And now, the Pentagon wants to use that same metal in drones to make them lighter, stronger, and more economical. Basically, the Pentagon needs this metal to make the drones all they can be.

Thing is, there are maybe three companies in the world that can make those kinds of parts.

And two of them have to carve individual parts from blocks of metal.

My Beltway birdie has told me about a third outfit that can cast individual parts from liquid beryllium, shaving thousands off the cost of parts and leaving the military drooling at their feet.

The rest is all very technical and complex, which is exactly why I put together this presentation to simplify it for you.

As you’ll see, the very companies that make drones — Northrop, Lockheed and the like — are already pounding on this company’s door, all but begging them to cast beryllium parts for their products.

This isn’t your mainstream news story. But it’s one you won’t want to be the last to hear about. 

Call it like you see it,

Nick Hodge
Editor, Energy and Capital