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Raytheon (RTN) Secures Deal to Acquire ESSM Spare Parts

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Raytheon Company’s (RTN - Free Report) business segment, Missile Systems, recently secured a contract for procuring life-of-type-buy and assembly-level spares of Evolved Sea Sparrow Missile (ESSM) Block I variant. Work related to the deal is scheduled to be over by June 2021.

Details of the Deal

Valued at $25 million, the contract was awarded by the Naval Sea Systems Command, Washington, D.C. Majority of the work will be executed in Andover, MA; Tucson, AZ and San Jose, CA.

The company will utilize fiscal 2018 weapons procurement; operations and maintenance; and other procurement funds to finance the task.

A Brief Note on ESSM

The ESSM provides self-defense battlespace and firepower against high-speed, highly-maneuverable anti-ship missiles in the naval space. Notably, it is an international cooperative upgrade of the RIM-7 Sea Sparrow Missile.

The ESSM program is a global joint initiative undertaken by the United States, the North Atlantic Treaty Organization (“NATO”) and other allied nations to design, develop, examine and procure ESSM. Currently, ESSM has more than 2,000 proven rounds in service or in production, with another 1,500 rounds expected to hit market in the near term.

What’s Favoring Raytheon?

Increasing geo-political tensions across the globe have prompted nations, both developed and developing, to strengthen their defense systems manifold. With rapid technological upgrade, missile defense steadily plays a pivotal role for a nation’s defense strategy.

Being one of the forerunners in the U.S. missile space, Raytheon has been enjoying a steady stream of missile contracts from the Pentagon. In May, the company secured a $300 million order for delivering its combat-proven Patriot air and missile defense system to Romania. Also, it won a few other similar missile-related contracts, which enabled the company to clinch classified bookings worth $700 million for missiles during the second quarter.

No doubt, such a solid order flow for the system is capable of substantially boosting Raytheon’s top line. As a result, the company’s Missile Systems (MS) division that includes the ESSM program recorded second-quarter 2018 net sales of $2,051 million, reflecting a year-over-year improvement of 8%. Considering this, we expect the latest contract to help this segment deliver similar solid performance in the third quarter as well.

Furthermore, the rocket and missile market is projected to grow from $55.5 billion in 2017 to $70 billion by 2022, at a CAGR of 4.74% during the forecast period (as per Markets and Markets research firm). In this context, frequent contract wins from the Pentagon for its various missiles, including the latest one, should allow Raytheon to gain more shares in the aforementioned rocket and missile market.

Price Movement

In a year’s time, shares of Raytheon have gained 9.9% compared with the industry’s 18.8% growth. The underperformance may have been due to the stiff competition that the company faces in the aerospace and defense industry.

Zacks Rank & Key Picks    

Raytheon currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same space are Aerojet Rocketdyne (AJRD - Free Report) , Teledyne Technologies (TDY - Free Report) and Ducommun (DCO - Free Report) . While Aerojet and Teledyne sport a Zacks Rank #1 (Strong Buy), Ducommun carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Aerojet delivered an average positive earnings surprise of 9.27% in the trailing four quarters. The Zacks Consensus Estimate for 2018 earnings moved north 30.9% to $1.27 over the past 60 days.

Teledyne came up with an average positive earnings surprise of 17.00% in the trailing four quarters. The Zacks Consensus Estimate for 2018 earnings moved up 9.3% to $8.25 over the past 60 days.

Ducommun pulled off an average positive earnings surprise of 129.04% in the trailing four quarters. The Zacks Consensus Estimate for fiscal 2018 earnings rose 24.3% to 92 cents over the past 60 days.

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