The stock rose to a new 52-week high of $77.93 last week after reports that the Syrian government had used chemical weapons in the ongoing civil war in that country, a move that President Obama indicated would make a U.S. military response more likely.
Raytheon pulled back slightly in the interim, but it has regained some strength in the last few days after Republican leaders indicated they would support the president's plan to order a military strike.
Unmanned Weapon Use Is on the Rise
Regardless of whether the U.S. moves against the Syrian regime, the crisis has highlighted the trend toward automated weaponry that is becoming more prevalent in modern warfare, particularly in the wake of long and difficult campaigns in Iraq and Afghanistan.
Raytheon has benefited from that trend. In addition to the Tomahawk, it makes sensors for unmanned aerial vehicles (UAVs), or pilotless drones, which have become a key tool for the CIA and the military in tracking down terrorists in remote areas.
UAV spending has so far resisted defense cuts in the U.S. and abroad. According to market research firm Teal Group, global spending on drones will more than double in the next decade, to $11.9 billion in 2023 from $5.2 billion in 2013. Sensors are a big part of that story, accounting for about 50% of a drone's total cost.
In addition, the White House has requested 196 Tomahawks in its budget submission for fiscal 2014—the same number as in fiscal 2013—at a total cost of $325 million. Raytheon would also likely pick up some extra sales to replace any cruise missiles fired on Syria.
A Winning Buy Call
Investing Daily managing director John Persinos, who has long experience in both politics and the aviation industry, has been keeping a close eye on Raytheon for some time.
In a May 4, 2012 article, he issued a buy call on the stock. He liked the fact that Raytheon wasn't in the competitive business of making UAVs themselves but instead supplied the sensors, something it did particularly well because of its long history of making radar equipment and sophisticated missile guidance systems.
"Raytheon's sensors are prized by the military for their unique ability to penetrate cloud cover. Raytheon continually develops lighter, high-reliability sensors—exactly what the military covets most,” Persinos wrote.
Despite the wind-down of the Iraq and Afghanistan conflicts, Persinos saw a wide range of global trouble spots that would be suitable for UAV use. He also felt that investor concerns about military budget cuts were "overwrought.”
Sixteen months after Persinos recommended Raytheon, the shares have surged over 42%. Investors who followed his call have also been benefiting from the company's $0.55-a-share quarterly dividend, which it raised from $0.50 with the May 2013 payment. The stock yields 2.9%.
Raytheon has a long history that goes well beyond cruise missiles and UAVs. The company was founded in Cambridge, Massachusetts, in 1922 as the American Appliance Company. Its first invention eliminated one of the large, costly batteries that powered home radios. During World War II, Raytheon supplied components for U.S. and British radars and proximity fuses for anti-aircraft shells, among other things.
The company restructured its operations effective April 1, 2013. It now operates through four divisions:
- Integrated Defense Systems (which supplied 26% of Raytheon's second quarter sales) specializes in air and missile defense, radars and technology for managing command, control, communications, computers and intelligence. This business also produces air traffic management systems, sonar devices, torpedoes and electronic systems for ships.
- Intelligence, Information and Services (24% of second quarter sales) provides computer-security products.
- Missile Systems (26%) makes defensive and offensive missiles for air, sea, land and space.
- Space and Airborne Systems (25%) builds radar and other sensors for aircraft, spacecraft and ships.
In the second quarter, Raytheon's overall revenue rose 2.1%, to $6.12 billion from $5.99 billion a year ago. Stronger sales at Missile Systems and Integrated Defense Systems offset declines and Intelligence, Information and Services and Space and Airborne Systems.
Excluding unusual items, earnings per share gained 4.5%, to $1.64 from $1.57. The latest results topped analysts' expectations of $1.30 a share in adjusted profits on $5.7 billion of revenue.
Raytheon also updated its financial outlook for the full year. It now expects sales of $23.5 billion to $23.7 billion, up from its April forecast of $23.2 billion to $23.7 billion. It feels adjusted earnings will rise to $6.00 to $6.10 a share, up from $5.75 to $5.90.
Even so, the company's bookings fell to $5.3 billion in the latest quarter from $6.2 billion a year ago. Its total backlog now stands at $32.4 billion, down slightly from $33.9 billion.
However, Raytheon is working on diversifying beyond the U.S. International orders are now approaching 40% of its backlog, CFO David Wajsgras told Reuters on July 26, a day after the company released its latest quarterly earnings.
It sees continued growth in the second half of 2013. "We are ramping up in a very meaningful way in our international air defense program and expect to have some significant new awards in the back half of the year,” said Wajsgras.
Raytheon trades at 12.9 times its last 12 months of earnings, which compares favorably to other big defense names like Boeing (NYSE: BA) at 19.4 and Lockheed-Martin (NYSE: LMT) at 13.9. The company is also an ongoing buyer of its own shares, having spent $450 million to repurchase 7.6 million worth of stock through the first half of 2013.