Lockheed’s $1 Billion Missile Defense Satellites Are Vulnerable to Budget Cuts — and Russia

Good news for Lockheed Martin (LMT -0.01%) investors! Last week, the Pentagon announced that it has awarded the defense giant $977.5 million to continue development of Next-Generation Overhead Persistent Infrared (Next-Gen OPIR) satellites for early warning and tracking of intercontinental ballistic missile (ICBM) and theater ballistic missile launches.

Bad news for Lockheed Martin investors: Lockheed won’t be building as many satellites as it thought.

Replacing SBIRS with OPIR

For more than a decade, the Pentagon has employed Space Based Infrared System satellites for missile defense — massive five-ton satellites placed in geosynchronous earth (GEO) and highly elliptical orbits (HEO) thousands of miles above Earth’s surface, scanning Earth for signs of missile ballistic launches.

In 2018, two companies, Lockheed Martin and Northrop Grumman (NOC 0.24%), were hired to build Next-Gen OPIR satellites to replace and upgrade SBIRS’ capabilities. As originally envisioned, Lockheed would build three OPIR satellites to assume GEO positions, and Northrop would build two more OPIR satellites to assume polar orbits. (A second batch of three more GEO satellites might be ordered at a later date.) Lockheed tapped RTX to build the sensor payload for its satellite. BAE Systems subsidiary Ball Aerospace will help Northrop build its sensors. Lockheed’s sats would begin launching in 2025, and Northrop’s in 2028, probably launching on rockets from United Launch Alliance (Vulcan Centaur rockets) or SpaceX (Falcon 9s).

In 2023, however, plans began to surface for Space Force to cut its OPIR satellite purchases — from Lockheed in particular — reducing Lockheed’s original batch of three OPIR GEO satellites to just two. Last week, this plan was confirmed, and the latest contract award of $977.5 million therefore represents less money than Lockheed investors had originally hoped would be awarded.

So you see, this apparently good news for Lockheed — $1 billion in revenue for its space division, which according to data from S&P Global Market Intelligence earns a respectable 8.9% operating profit margin — is actually bad news for the company. It’s not terrible news. As SpaceNews points out, Lockheed is still getting paid $8.2 billion total for its work — not bad money for just two satellites.

But it could still get worse.

How bad news could get worse for Lockheed Martin

Lockheed’s first OPIR GEO satellite may be delayed. Quoting Assistant Secretary of the Air Force for Space Acquisition and Integration Frank Calvelli, SpaceNews notes that RTX is “a year late,” potentially pushing the first satellite launch from 2025 into 2026. Indeed, according to the Government Accountability Office, “payload delivery [is] the main driver of … risk” in this program.

It’s not the only risk, either. Likely U.S. adversaries such as Russia and China are developing anti-satellite missiles designed to blind the U.S. military in time of conflict. And as I’ve argued for years, putting large spy satellites in fixed orbits just makes this job easier for them. Much better (for us), and much more complicated (for them) are the constellations of thousands and thousands of small satellites that companies like SpaceX are building — Starlink and the military-focused Starshield. It might be feasible to destroy five (or four) big Lockheed Martin and Northrop Grumman satellites, but it’s a whole lot harder to track and shoot down thousands of tiny Starlinks — so hard, in fact, that they might not even try.

The U.S. military knows this, of course. And according to SpaceNews, one reason Space Force may have reduced its order of multibillion-dollar Lockheed satellites, is to “disaggregate missile warning capabilities by diversifying satellite orbits.”

What investors should know

That’s actually good news for investors, though — Lockheed investors included — so long as you know how to play this “disaggregation” trend. Supplementing OPIRS, you see, Space Force is also building a constellation of at least 144 smaller missile warning and missile tracking satellites, which it calls the Proliferated Warfighter Space Architecture (PWSA) program.

Multiple defense companies are involved in the effort, with Lockheed, Northrop, and RTX all building various satellites for PWSA. Dedicated space companies like SpaceX, York Space Systems, and Rocket Lab are earning hundreds of millions of dollars from the effort as well. For example, Space Force hired Rocket Lab to build it 18 satellites for the “transport layer” of PWSA, at a total cost of just $515 million — less than half what Lockheed charges for one single OPIR GEO satellite.

A second advantage of these satellites is that they’re faster to build and faster to launch — so Congress has less time to fret over the price tag, and cancel them before completion. Rocket Lab won its PWSA contract in December 2023 for example, and plans its first launch in 2027 — just three and a half years later. That’s twice as fast as the 2018 to 2025 (or 2026? Or 2027?) timeline for getting Lockheed’s satellites in orbit.

When a space contract is moving that fast, it’s much harder to shoot down. And for space investors that’s perhaps the best news of all.