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On Dec 4, 2013, we upgraded our recommendation on Raytheon Company (RTN - Analyst Report) to Outperform from Neutral. The Massachusetts-based defense contractor currently holds a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

The company reported sterling earnings and revenue results in the third quarter 2013 with both comfortably beating the consensus. The upgrade takes into account Raytheon’s successful performance in the defense market worldwide.

With rising demand from the Gulf countries as well as from the Asia-Pacific region, we believe international sales will continue to be the company’s key revenue driver. At home, despite the sequestration, Raytheon appears to have clinched high-value contracts, which include the $353 million order for the Aegis weapon systems for the U.S. Navy. The Missile System and Space System segments brought in total orders worth $943 million and $852 million, respectively.

The 2014 fiscal budget prioritized investments in Missile and Space Systems, which is expected to bring in more contracts for Raytheon. In addition, the company’s focus on technological advancements, as exemplified by its GaN systems, will make defense solutions affordable and effective.

Raytheon’s business consolidation efforts will also provide successful cost-saving solutions, leading to expanding operating margin in the long term.

Nonetheless, the sequestration will to some extent dry up orders for this defense behemoth.

Other Stocks to Consider

Some other stocks worth considering in the defense sector include Huntington Ingalls Industries, Inc. (HII - Snapshot Report), Northrop Grumman Corp. (NOC - Analyst Report) and The Boeing Company (BA - Analyst Report). All the above stocks presently carry a Zacks Rank #2 (Buy).

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