In spite of the budget austerities and sequestration, defense majors are riding high on foreign orders. These have to some extent compensated for lower defense spending at home. Raytheon Co. (RTN) recently received the green light from Pentagon for the sale of some 15,000 anti-tank missiles to Saudi Arabia under two separate deals. Pegged at a combined value of $1.1 billion, the anti-tank missiles will be used to counter terrorism in this very politically volatile region. Shares of Raytheon have gained 51.6% year to date.
Last Thursday, the Defense Security Cooperation Agency (“DSCA”) notified Congress of the proposals in two separate notices, one for a $900 million deal for 13,935 missiles and the other for a potential $170 million sale covering 1,764 missiles. Though unlikely, lawmakers have 30 days to block the proposed sales.
The deals cover tube-launched, optically-tracked, wire-guided (“TOW”) 2A/2B radio-frequency Missiles and associated equipment, parts, training and logistical support. The TOW weapon system, with the multimission TOW 2A, TOW 2B, TOW 2B Aero and TOW Bunker Buster missiles, is the premier long-range, precision anti-armor, anti-fortification and anti-amphibious landing weapon system used throughout the world today. TOW is in service in more than 40 international armed forces and integrated into more than 15,000 ground, vehicle and helicopter platforms worldwide.
Raytheon is more focused on overseas sales to counter domestic budget pressure. Best known for its missile defense systems, such as the Patriot, Raytheon‘s international business is now expected to garner close to 30% of total revenues this year. At home, the 2014 fiscal defense budget prioritized investments in Missile and Space Systems, which is expected to bring in more contracts for Raytheon. In addition, the company’s focus on technological advancements, as exemplified by its GaN systems, will make defense solutions affordable and effective.
Investors may rightly be worried about the fate of the defense industry in the U.S. However, Raytheon and other leading contactors like Lockheed Martin Corp. (LMT) have emerged relatively unscathed so far, thanks to foreign contracts.
Pentagon’s largest contractor, Lockheed Martin, is touted to win a sizeable contract from South Korea for 40 of its F-35 Joint Strike Fighters. Although South Korea's Defense Ministry did not clearly specify Lockheed Martin as the winner, the country’s need of the hour to beef up its stealth capability leaves the company’s F-35A stealth jet as the only viable contender in response to North Korea’s growing nuclear threat.
The Massachusetts-based defense contractor – Raytheon – currently holds a Zacks Rank #1 (Strong Buy). Other stocks worth considering in the defense sector include The Boeing Company (BA) and General Dynamics Corp. (GD). Both these stocks presently carry a Zacks Rank #2 (Buy).
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