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Raytheon Company (RTN - Analyst Report) has received a contract worth $422 million for its combat-proven Paveway II family of precision-guided munitions. The contract was under a direct commercial sale from an international customer.

Paveway provides warfighter unparalleled accuracy and standoff capability that has revolutionized tactical air-to-ground warfare by converting dumb bombs into precision-guided munitions. Bombs equipped with Paveway kits have been tested and proven in every major conflict in which it has been used.

The new version of Paveway includes Global Positioning System (“GPS”)/Inertial Navigation System guidance capabilities. The new version is a combination of precision and flexibility of traditional laser-guided weapons and all-weather capability of Inertial Navigation System guidance. The old and new version put together evolves into a weapon that enhances the mission success rate while lowering the requisite sortie count and weapon inventory.

Raytheon has been meeting the needs of the U.S. armed forces as well as allied nations with its Paveway. In April this year, Raytheon had received a replenishment contract for Paveway IV from UK Ministry of Defense (“MOD”). Paveway IV is the latest generation GPS precision-guided munition.

Based in Massachusetts, Raytheon Company is one of the largest aerospace and defense companies in the U.S., with a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services.

Raytheon’s order backlog is greatly diversified, consisting of more than 15,000 contracts. Recently, Raytheon received a contract to deliver a Command, Control, Communications, Computers and Intelligence (“C4I”) system to the Kingdom of Saudi Arabia. The contract valued in excess of $600 million and was awarded as a direct commercial sale by the Saudi Ministry of Defense.

Going forward, revenue and earnings growth would continue to be driven by its strong presence in the areas of Intelligence, Surveillance and Reconnaissance (“ISR”); air & missile defense systems; border security; air traffic management; training and homeland security; and cyber security.

However, we remain concerned due to the U.S. defense budget, the fate of high-cost programs, risks related to key project executions and order cancellations. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Raytheon’s defense peers that are also facing the risk of defense budget cuts are L-3 Communications Holdings Inc. (LLL - Analyst Report) and Lockheed Martin Corporation (LMT - Analyst Report).

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