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We have maintained our Neutral recommendation on Raytheon Company (RTN - Analyst Report) on Sep 6, 2013, based on a continous flow of orders, cost reduction initiatives and strong second quarter results. However, these positives are partly tempered by the defense budget uncertainty and the company’s high-cost programs.

Why the Reiteration?

Raytheon is one of the best-positioned companies among the large-cap defense players due to its non-platform-centric focus. The company is also confident of its domestic market.

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. During the second quarter, the company posted strong results driven by efficient program execution and its ability to offer premium quality products that match customer security needs.    

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. Going forward, we expect the company to remain well positioned based on its realligned segments, investments in technology and innovations, international exposure, steady flow of contracts, cash deployment strategy, and cost reduction initiatives.

These positives are, however, offset by apprehensions over the future growth of the U.S. defense budget, the fate of high-cost programs, risks related to key project executions and order cancellations.

Other Stocks to Consider

Raytheon presently retains a Zacks Rank #2 (Buy). Other stocks that are worth considering in the space are Alliant Techsystems Inc. (ATK - Analyst Report), Lockheed Martin Corp. (LMT - Analyst Report) and Northrop Grumman Corp. (NOC - Analyst Report). While Alliant Techsystems carries a Zacks Rank #1 (Strong Buy), Lockheed Martin and Northrop Grumman hold a Zacks Rank #2 (Buy).


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