Getting a billion dollar contract from a government agency or client is a big deal, but it's a bigger deal to some than others and this is the trick to this scenario.


Large government contractors like Lockheed Martin get multi-billion dollar contracts all the time. It's business as usual for them. And while they drive revenue growth and earnings, a single contract in the single digit billions isn't going to move the share price much. After all, LMT does around $19 billion in revenue each quarter!


Smaller companies, on the other hand, will be impacted more by large government contracts. So filtering the scenario by smaller market cap companies reveals outsized moves of stock price when the new contract awards are issued. It also shows a much larger one-day price move on the scenario stats.





CAVEATS


  • One caveat to note before going all in on these events is that not all contracts are created equal. Some contracts that look like awards do not guarantee any money. These are often called IDIQ contracts (indefinite quantity indefinite delivery). It means the government can buy up to the contract ceiling...but they don't HAVE to. So the money is not guaranteed. Do read the details and do some due diligence before jumping in and betting the house on it. It can pay off big time for the contractor, but sometimes these IDIQs do not get the cash they could.


  • Size also matters. The bigger the contract, the bigger the gains.


HOLD TIMES


The hold times can vary for these event types. Big contract wins will definitely move the share price for a day, but the math is important. If a company gets a $10 billion award, that's great, but over what period of time is the contract award - 1 year, 5 years, 10 years? 


The time frame of the contract award matters as it changes the revenue addition from $10B to $2B to $1B per year respectively, for these different time intervals. 


If a company that's doing $1B a year in revenue gets another billion per year in revenue, the company's revenue doubled. In theory, the price should double assuming all other factors stay the same. But will it double in a day? Maybe, maybe not. 


It can take investors time to learn about the event, research the company, explore the details of the contract. So the share price may rise slowly over time as this process plays out. In other cases, traders may not read a thing but the award and go all in on the trade without reading anything. This can lead to big gaps up and quick selloffs as traders try to lock in profits. Often, the slower money - the professional investors - come in after these moves and bring the share price up again over the day that come.


Longer term investors can use this scenario to identify companies growing quickly via contracts as part of fundamental research analysis. Multiple large contract awards in a series indicates strong growth which often leads to higher profits and a higher valuation, as seen in the graph of FLR below. A series of government contracts led to 100% growth over just two years. 



How you use the scenario depends on how long you want to hold the equity.