Raytheon Company’s (RTN) Standard Missile-6 (“SM-6”) has been approved by the U.S. Navy to be carried by ships in the Aegis Combat Weapon System baselines 5.3 and 3.A.0 series.
SM-6 is a surface-to-air supersonic missile, which can be operated in both active and semi-active modes. It provides the warfighter with the enhanced capability to detect targets beyond line of sight. It is also capable of shielding against any land-attack or anti-ship cruise missile in flight.
Till date, Raytheon has supplied over 130 missiles to the U.S. Navy. The recent approval from the U.S. Navy will increase the utilization of SM-6 from five to over 35 ships. This will support top-line of Raytheon in the present scenario of falling orders and looming sequestration threats in the defense sector. The spending bill for fiscal 2015 has allocated $554 billion for the sector, down from $572 billion in fiscal 2014.
At the macro level, gradual change in defense spending patterns has been noticed. Focus has shifted to high-tech intelligence equipments and intelligence, surveillance and reconnaissance (“ISR”) technologies in light of the rising geopolitical tensions and terrorism. In order to make the most of non-platform-centric focus, big defense operators are investing substantially in research and development (“R&D”) to develop new products and upgrade existing ones to win more deals.
This is definitely a positive for Raytheon as the company has been steadily strengthening its non-platform-centric operations and expanding its presence in the field of ISR. In Nov 2014, Raytheon acquired Blackbird Technologies, one of the leading suppliers of persistent surveillance, secure tactical communications and cybersecurity solutions.
Moreover, in order to battle sequestration woes, Raytheon has focused on cutting costs. In the nine months ended Sep 2014, the company had operating expenses of $14.4 billion, down 7.9% from the prior-year period. It is also commendable that the company is investing heavily in technological upgrades and R&D. The company spent $356 million on R&D in the nine months ended Sep 2014, up 2.9% from the prior-year period.
Raytheon delivered positive earnings surprise in three out of the last four quarters with an average beat of 3.61%. With continued focus on reducing expenditure, technological upgrades, innovation and enhanced product offering, Raytheon will likely witness consistent earnings growth.
Raytheon currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the same sector include The Boeing Company (BA), General Dynamics Corp. (GD) and Northrop Grumman Corporation (NOC), each carrying a Zacks Rank #2 (Buy).
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