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Raytheon Company (RTN)

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We have upgraded our recommendation on Raytheon Company (RTN) to Outperform from Neutral, as we believe the company will fare better among the large-cap defense players in the face of downward defense budget trends and the incoming effect of sequestration. Our bullishness comes from its nonplatform-centric focus, rising international sales and substantial presence in the domestic classified market.

Looking forward, Raytheon enjoys strong order bookings and order backlog, an improving balance sheet, growing cash flow, and steady operational improvements. Future growth will be driven by its focus in the areas of Intelligence, Surveillance and Reconnaissance; air & missile defense systems; border security; air traffic management; training & homeland security; and cyber security.

We feel the discounted valuation of the company is unjustified, owing to its non-platform-centric focus, rising international sales, substantial presence in the classified market, strong order bookings and order backlog, strong cash flow generation and its focus on shareholder value. Our $67.00 target price is based on P/E multiple of 12.9x 2012 EPS.

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