We have maintained our Neutral recommendation on Raytheon Company (RTN - Analyst Report) on Jul 5, 2013 based on its international exposure, strong order bookings and order backlog, cash deployment strategy, and cost reduction initiatives. However, the budget pressure compels us to remain on the sidelines.
Why the Reiteration?
Raytheon is one of the best-positioned companies among the large-cap defense players due to its non-platform-centric focus. This insulates the company from program specific risk related to cancellation or deferral of any specific program.
Going forward, revenue and earnings growth would continue to be driven by its strong presence in the areas of Intelligence, Surveillance and Reconnaissance; air & missile defense systems; border security; air traffic management; training and homeland security; and cyber security.
International sales continue to be a key source of sales for the company. The company believes that it is progressing well on opportunities like Kuwait Patriot, the Oman ground-based air defense system, as well as radars and missiles.
With growing threats to the environment and demand from customers to acquire the most advanced technologies in the world, the company is confident that the international portfolio will continue to be strong.
In order to offset the budget pressure, the company is aggressively pursuing cost-containment measures, making acquisitions, consolidating its business, and driving the international mix higher, thereby maintaining an industry-leading operating margin. Recently, Raytheon reorganized its business through segment realignment. The new structure will drive productivity, agility and affordability in a challenging defense and aerospace market environment.
Also, Raytheon’s under-leveraged balance sheet provides financial flexibility in matters of incremental dividend, ongoing share repurchases and earnings accretive acquisitions. In Mar 2013, the company raised its regular quarterly dividend by 10% from 50 cents per share to 55 cents per share (annualized $2.20 per share) generating a dividend yield of 3.34%.
Despite the positives, apprehensions over future growth of the U.S. defense budget, the fate of high-cost programs, risks related to key project executions and order cancellations keep us concerned.
Other Stocks to Consider
Stocks worth considering are Erickson Air-Crane Inc. (EAC - Snapshot Report), The Boeing Company (BA - Analyst Report) and Northrop Grumman Corp. (NOC - Analyst Report). While Erickson Air-Crane carries a Zacks Rank #1 (Strong Buy), The Boeing Company and Northrop Grumman hold a Zacks Rank #2 (Buy).