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The Department of Defense ("DoD") handed out a dozen contracts worth nearly $1.4 billion recently. Among the biggest winners was Lockheed Martin Corp. (LMT - Analyst Report), which won a whopping $852 million contract while Raytheon Company (RTN - Analyst Report) snatched the second place receiving a $200.5 million modification contract.  

Raytheon’s principal contract involves the supply of 354 AIM-9X Sidewinder Block II All Up Round Tactical Low Rate Initial Production Lot 13 Missiles, plus 354 Block II Active Optical Target Detectors to the U.S. military as well as Air Force. Also included in the buyers’ list are the governments of Morocco, Malaysia, Kuwait and Oman.

The sidewinders are a short-range air-to-air missile used by fighter jets, usually in battle against other fighter jets. Currently, the missiles are being operated by the U.S. and nine allied nations. To date, 5000 of the AIM-9X Sidewinders have been supplied.

The order also includes the delivery of 178 Block II Captive Air Training Missiles (“CATMs”), which looks almost like a live missile minus the warheads and rocket motors as well as 9 Special Air Training Missiles, live missiles packed with telemetry features in place of a warhead, which are used for test firings.

The company will supply seven of the Special Air Training Missiles to the U.S. Navy and ship two to Saudi Arabia along with other related equipment. The contract is expected to be concluded by Aug, 2015.

Raytheon’s missile business has been the key growth engine for the company as is evident from its second quarter operating results. The company recently secured another contract from the Missile Defense Agency, valued at $218.5 million, for the completion of the assembling and delivery of 29 Standard Missile-3 Block IB missiles.

Going forward, we believe the company’s Integrated Defense and Missile divisions will continue to act as a catalyst especially with higher orders from Raytheon’s Middle East clients in the wake of rising security issues in that region.

In addition, Raytheon’s focus on business diversification will lend substantial upside to returns. The strategic buyout of Visual Analytics Inc. at the end of the second quarter will further boost the company’s expertise in the field of data analysis, an effective defense tool to counter terrorism.

Currently, Raytheon holds a Zacks Rank #1 (Strong Buy). Other defense operators also worth mentioning are Zacks Ranked #1 Alliant Techsystems Inc. (ATK - Analyst Report) and Zacks Ranked #2 (Buy) B/E Aerospace Inc. (BEAV - Snapshot Report).

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