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Raytheon Secures $1.5B FMS Deal for Patriot Missile System

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Raytheon Company (RTN - Free Report) recently won a modification contract for Phased Array Tracking Radar to Intercept on Target (PATRIOT). Work related to the deal is scheduled to be completed by Dec 31, 2022.

Valued at $1.5 billion, the contract was awarded by the U.S. Army Contracting Command, Redstone Arsenal, Alabama. The company will utilize fiscal 2018 foreign military sales (FMS) funds to execute the task.

Significance of the PATRIOT Missile System

PATRIOT’s long-range, high-altitude, all-weather missile defense system is specifically designed to counter threats from tactical ballistic missiles and cruise missiles, and attacks from other advanced fighter aircraft. With 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, the significance of this system has shifted a notch higher.

Foreign Military Sales: A Key Growth Driver

Being one of the top missile makers across the globe, Raytheon’s foreign military contracts continue to act as a key catalyst. Internationally, the company’s bookings comprised 21% of the total second-quarter bookings, while sales accounted for 31% of its total sales.

In particular, increasing geopolitical tensions in Europe, Asia Pacific and the Middle East have been driving demand for Raytheon’s missile systems in international market, with PATRIOT being the center of attraction. The latest deal is a further testament of the same.

In the recent past, Raytheon witnessed a handful of FMS contracts for its PATRIOT missile system. In August 2018, Swedish government signed a $1 billion agreement with the U.S. administration to purchase Raytheon’s Patriot missiles. Also, Poland signed a Letter of Offer and Acceptance (LOA) agreement with the U.S. government to procure two Patriot System Batteries along with fire units for $4.75 billion earlier in March.

Such notable contract wins, including the latest one, should enable Raytheon to strengthen its foothold in the international defense market.

 U.S. Budget Revision: A Boon

The U.S. fiscal 2019 defense budget, which got the Senate’s nod this June, provisioned $12.9 billion for missile defense. Raytheon, being a prominent missile contractor in the United States, will significantly benefit from the proposed budget that also includes an investment plan of $1.1 billion for 240 Patriot Missile Segment Enhancements.

Such expansionary budgetary amendments should add more impetus to Raytheon’s revenue growth in the coming days.

Price Movement

In a year’s time, shares of Raytheon have gained about 11.2% compared with its industry’s 17.5% rally. This underperformance might have been caused by stiff competition that the company faces in domestic as well as overseas markets.

Zacks Rank & Key Picks

Raytheon currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same sector are Aerojet Rocketdyne Holdings (AJRD - Free Report) , Engility Holdings (EGL - Free Report) and Huntington Ingalls Industries (HII - Free Report) . While Aerojet Rocketdyne Holdings sports a Zacks Rank #1 (Strong Buy), Engility Holdings and Huntington Ingalls carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Aerojet Rocketdyne came up with 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 last 90 days.

Engility Holdings delivered an average positive earnings surprise of 19% in the preceding four quarters. The Zacks Consensus Estimate for 2018 earnings climbed 16.8% to $2.02 over the last 90 days.

Huntington Ingalls pulled off an average positive earnings surprise of 9.48% for the trailing four quarters. The Zacks Consensus Estimate for 2018 earnings has moved 6.4% north to $17.24 over the last 90 days.

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