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Raytheon (RTN) to Gain From US-Sweden $1.1B Deal for Patriot

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Raytheon Company (RTN - Free Report) awaits confirmation from Sweden as the latter looks to close a deal in the coming weeks for procuring Patriot air defense missile system. Sweden is all set to become the sixteenth nation to rely on Raytheon’s Patriot Missile Defense System.

Details of the Deal

The deal is approximately valued at $1.13 billion, which includes four Patriot Configuration 3+ modernized firing units and their subsequent parts along with an undisclosed number of missiles. The contract agreement further includes options to purchase up to 300 Patriot missiles. The deal value could reach the $3 billion mark, if the options are exercised before August 10.

Army Design Office at the Swedish Materiel Administration currently awaits its government’s approval for signing the contract. Once approved, this will be Sweden’s largest arms purchase since 2013. Delivery is expected to commence in 2021.

Foreign Military Sales

Raytheon, being one of the top missile makers in the United States, enjoys heavy inflow of international orders for its varied products. Notably, the company had international bookings of $2,848 million in the first quarter of 2018, which reflected 45% of total bookings received by the company.

Raytheon’s international sales included $1.6 billion to provide advanced Patriot air and missile defense capability to an international customer and a $987 million deal for the Upgraded Early Warning Radar (UEWR) system for Qatar.

The company’s Foreign Military Sales through the U.S. government was $718 million in first-quarter 2018. This reflected 11% of the total net sales made by the company.

Poland was also seen in making significant order with Raytheon in March 2018, after it signed a Letter of Offer and Acceptance (“LOA”) agreement with the U.S. government to procure two Patriot System Batteries along with fire units at a valuation of $4.75 billion. This deal made Poland the 15th nation worldwide and 7th NATO member to opt for Raytheon’s Patriot System.

How is the PATRIOT Missile System Beneficial?

PATRIOT’s long-range, high-altitude, all-weather missile defense system is specifically designed to counter threats from tactical ballistic missiles, cruise missiles and attacks from other advanced fighter aircraft. It also develops interceptors and has consistently upgraded this missile defense system in order to keep pace with the changing dynamics of modern warfare. The system’s importance has shifted a notch higher wih the introduction of a pivotal new element in the form of gallium nitride-based active electronically scanned radar array or AESA, which enables 360 degree coverage by the Patriot radar.

What’s Driving Sweden’s Missile Purchase?

In the past few months, Sweden’s political tensions with Russia have increased. Per a news.com.au release, this has been due to Russia’s invasion and hostility towards Crimea and Ukraine along with its aggressive stance towards other Baltic nations such as Latvia, Lithuania, Estonia and Poland. Such tense circumstances have forcefully led Sweden to modernize its armed forces and bank upon Raytheon’s
Patriot system for military defense.

U.S. Budget Revision to Assist Raytheon

Furthermore, President Trump’s proposed fiscal 2019 defense budget provisioned $12.9 billion for missile defense in February, due to which demand for missiles has been on the rise. Raytheon, being one of the top missile makers in the United States, will surely be a significant beneficiary from the proposed budget, which also includes an investment plan of $1.1 billion for 240 Patriot Missile Segment Enhancements.

Notably, Raytheon’s Integrated Defense Systems (IDS) unit that manufactures the Patriot air missile defense system reported first-quarter 2018 revenues of $1.5 billion that inched up 6.5% year over year. The increase in external net sales at IDS was primarily due to higher net sales on an international Patriot program, awarded in the first quarter of 2018.

Apart from the frequent contract wins that Raytheon already enjoys from Pentagon, we may expect such major developments and prospective contracts to add more impetus to Raytheon’s revenue growth in the days to come.

Price Movement

Raytheon’s stock has improved about 28.3% in the past twelve months compared with the broader industry’s increase of 25.8%. The outperformance was most likely led by the company’s strong international sales and a robust balance sheet.



 

Zacks Rank & Key Picks    

Raytheon currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same sector are AeroVironment, Inc. (AVAV - Free Report) , The Boeing Company (BA - Free Report) and Wesco Aircraft Holdings, Inc. (WAIR - Free Report) .

While AeroVironment sports a Zacks Rank #1 (Strong Buy), The Boeing Company and Wesco Aircraft Holdings carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AeroVironment delivered an average positive earnings surprise of 147.43% in the last four quarters. The company’s long-term growth rate is pegged at 20%.

The Boeing Company came up with an average positive earnings surprise of 29.51% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has risen by 3.98% to $14.61 in the last 90
days.

Wesco Aircraft Holdings’ long-term growth rate is pegged at 12%. The Zacks Consensus Estimate for 2018 earnings has risen by 10% to 77 cents in the last 90 days.

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