Raytheon Stock Has Huge Growth Potential
Raytheon Company (NYSE:RTN) has reached its highest-ever valuation. Raytheon stock has gained over 15% year-to-date and has plenty of potential left for growth. Raytheon recently won an over-$100.0-million contract to update the U.S. Air Force’s “RQ-4 Global Hawk” autonomous aircraft. Raytheon stock did not gain much on the news, but it continues to trade at the highest end of its 52-week range, with a market cap of over $41.0 billion.
From a purely investment perspective, the first thing to know about Raytheon stock is its dividend. Last March, Raytheon’s annual dividend disbursement grew 9.3%. But, this wasn’t some rare event. Raytheon has frequently raised its dividend, having done this for about 12 years in a row.
The Pentagon Will Spend More on Defense in 2017
As will be the case for most defense sector companies, the relatively lower Pentagon spending of the past few years will turn to a more bullish cycle.
Over the next few weeks, Raytheon stock, like its sector counterparts, will likely not post major gains, regardless of how favorable its prospects are. This has nothing to do with Raytheon itself or the needs of the U.S. military; rather, rumors that Federal Reserve chair Janet Yellen will issue an interest rate hike before the end of 2016 has forced many traditional Wall Street stocks to remain flat. (Source: “Defense Stock Roundup: Lockheed Martin Wins $10B Deal; Boeing, Raytheon Dominate Headlines,” Zacks, August 23, 2016.)
It was no surprise that the S&P 500 Aerospace & Defense (Industry) index and the Dow Jones U.S. Select Aerospace & Defense Index saw measly gains of 0.02% and 0.2% respectively, in recent trading sessions. (Source: Ibid.) Still, Raytheon is among the Olympus of U.S. military contractors. Raytheon builds the “Patriot” missile, and it has a major new customer for this weapon system (see below). But the company also relies on sales from the cybersecurity and Internet sectors.
Raytheon is credited as being the company that invented the e-mail in 1970. One of Raytheon’s upcoming big revenue generators is a next-generation long-range radar system for the US Air Force. That could be worth upwards of $1.0 billion. As promising as Raytheon’s military programs and technical capabilities are, it can rely on good-old-fashioned cash. It has some $2.6 billion of this rare commodity.
Too much cash lying around, however, doesn’t do much work for you. You must invest it to grow it. This means that Raytheon will likely be on the lookout for some interesting companies in order to build more revenue. One of the areas that Raytheon could be targeting, given the sector’s increasing importance, is cybersecurity.
The e-mail scandal surrounding presidential candidate Hillary Clinton has certainly promoted the need—or desire, depending on which side you’re looking from—for greater control over electronic data. Until recently, Raytheon was a big player in the military and private jet business. But it sold Beechcraft in 2007 and has no major stake in any next-generation fighter jet.
Tensions Good for Raytheon stock
Indeed, Raytheon has chosen its big future role and it has cybersecurity written all over it. In 2015, Raytheon acquired one of biggest cybersecurity providers: Websense Inc. and, in January 2016, Websense changed its name to Forcepoint Federal LLC, announcing several new cyber products. Raytheon has integrated Forcepoint, Websense, and Stonesoft (another recent acquisition), which specializes in next-generation firewalls (NGFWs). You see now why a Clinton presidency might be so delicious for Raytheon stock; “e-mail-gate” anyone?
Meanwhile, rising international tensions have raised demand for Raytheon’s wares. The combination of its hallmark cybersecurity and defense missile systems can win many customers amid tensions in the Far East, Middle East, and Europe. These tensions will translate into a higher Raytheon stock price in 2017. Poland has made the first major purchase in this context. RTN stock has a bullish prospect thanks to this emerging strategic reality over the next few years.
As it happens, Poland is on the frontline of the new—and not-so—Cold War between the West and Russia. That means Poland will have a massive, if not key, role in the defense of NATO’s security. In a sense, Poland is playing the role that West Germany had during the Cold War; the last line of defense against the then-Iron Curtain, now simply Russia.
The Polish Ministry of National Defense has allotted some $21.0 billion to buy, among other weapons, the Patriot missile. Expect more details and more related deals between the Polish government and Raytheon next September. Poland has already pledged to splurge 2% of its GDP—NATO’s standard sum—on new defense equipment.
In the last quarter, Raytheon delivered $2.38 per share in net profits. That was a sharp year-over-year increase of 40%. Its adjusted earnings per share (EPS) came in at $1.75, against a $1.7 consensus. Revenues increased 3% and totaled more than $6.0 billion, against a $5.8 billion consensus. Moreover, Raytheon has a backlog of orders amounting to $35.3 billion, against $34.8 billion at the end of the first quarter.
To learn more about the investment case of defense stocks, enjoy our report, “Military’s ‘6th Branch’ to Create 22,000 Millionaires Again?” Click here to get the full story.