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Raytheon Wins $85M Deal to Support ESSM Block 2 Program

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Raytheon Company’s (RTN - Free Report) Missiles Systems business unit recently secured a modification contract to procure low rate initial production (LRIP) requirements for fiscal 2020 Evolved Sea Sparrow Missiles (ESSM) Block 2. Work related to the deal is expected to be completed by June 2023.

Valued at $84.8 million, this latest deal was awarded by the Naval Sea Systems Command, Washington, DC.Majority of work related to the deal will get executed in Tucson, AZ.

Attributes of ESSM Block 2 Missiles

Raytheon’s ESSM is an international cooperative upgrade of the RIM-7 Sea Sparrow Missile. It provides enhanced ship defense against high-speed, highly maneuverable anti-ship missiles in the naval environment including aircraft, high and low velocity air threats.

The program is a global joint initiative undertaken by the United States, the North Atlantic Treaty Organization (NATO) and other allied nations that include Australia, Canada, Denmark, Germany, Greece, Norway, Spain, Turkey and the Netherlands. Under this initiative, these countries plan to design, develop, examine and procure ESSM missiles. At present, ESSM has more than 2,000 proven rounds in service or in production, with another 1,500 rounds anticipated.

What’s Favoring Raytheon?

Increasing geopolitical tensions across the globe have prompted nations, both developed and developing, to strengthen their defense systems manifold. Following the rapid technological advancements, missile defense has steadily emerged as a key catalyst for a nation’s defense strategy.

With the United States being the world’s largest weapons supplier, it’s a golden era for the nation’s premier defense contractors like Raytheon.

Being a prominent missile maker, Raytheon frequently secures a number of major contracts for missile development and enhancements. Such contract flows aid its Missile Systems segment to register solid top-line growth. Evidently, the segment registered solid sales growth of 4% year over year during the third quarter of 2019.

Considering the prevailing socio-economic challenges worldwide, we may expect Raytheon to consistently secure such contracts in coming days.

Moreover, the fiscal 2020 U.S. defense budget includes a spending plan of $13.6 billion for varied missile defense programs, which in turn, should usher in notable contract wins for prominent missile-makers like Raytheon. The latest won contract is a testament to that.

Looking Ahead

Currently, 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 (per Markets and Markets research firm). This, in turn, will provide Raytheon with ample opportunities to enhance its market share in the aerospace and defense industry.

Price Performance

In a year’s time, shares of Raytheon have gained 25.9% compared with the industry’s 36.3% rally.

Zacks Rank & Key Picks    

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

For 2019 earnings, Ducommun’s Zacks Consensus Estimate climbed 2.8% over the last 90 days. Also, the company came up with a positive earnings surprise of 14.75% in the last reported quarter.

Heico Corp delivered an average positive earnings surprise of 10.07% in the last four quarters. The Zacks Consensus Estimate for fiscal 2019 earnings moved 4% up over the past 90 days.

Teledyne Technologies delivered average positive earnings surprise of 10.13% in the last four quarters. The Zacks Consensus Estimate for 2019 earnings moved 2.1% north over the past 90 days.

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