Raytheon Hits 52-Week High on Buyouts and Foreign Sales

Shares of Raytheon Company RTN scaled a new 52-week high of $113.71 on Oct 12, closing a little lower at $112.31. With a market cap of around $34.09 billion, the company has seen its shares soar roughly 16.1% in the past one year, outperforming the 7.4% gain of the S&P 500 over the same period.

What's Driving Raytheon Up?

Raytheon is one of the best-positioned companies among the large-cap defense players due to its non-platform-centric focus given the declining trend in U.S. defense spending. To counter the sequestration effect, the company has been heavily investing in technological upgrades. It has been acquiring surveillance and cybersecurity companies hoping to boost its intelligence business and leverage the commercial prospects of cyber. With the U.S. fiscal 2016 budget proposal emphasizing cyber programs, cyber-oriented work is expected to yield solid growth in the coming years.

Recently, Raytheon announced its acquisition of Herndon, VA-based Foreground Security, which is aimed to enhance its cybersecurity and electronic warfare capabilities. Foreground Security is a provider of managed security operations centers and cyber-security services. It monitors cyber threats through its Virtual Security Operations Center and Automated Threat Intelligence Platform.

Post the acquisition, it will operate as Raytheon Foreground Security ("RFS") as part of Raytheon Intelligence, Information and Services. RFS has a strong portfolio of solutions and proprietary technology in some of the booming segments of the cybersecurity space. These will help Raytheon expand its managed security services to the federal, international and commercial markets. Out of approximately 165 employees under RFS, 85% have been trained as cybersecurity experts.

In the same context, in May 2015, Raytheon acquired Websense for $1.9 billion. The newly formed unit – Raytheon|Websense – combined Raytheon's advanced cyber security technologies with Websense's TRITON platform to create a new level of defense-grade cyber security solutions. It provides unified web, email, mobile and data security solutions globally for protecting an organization's data and users from external and internal threats.

In recent years, Raytheon has invested more than $3.5 billion to expand its cybersecurity capabilities. The company aims to provide best-in-class security solutions to the U.S. Department of Homeland Security to counter rising cyber threats. According to the company, global cybersecurity incidents have escalated an average 66% on a yearly basis between 2009 and 2014.

Raytheon also has a distinct focus on its overseas business. Foreign military contracts continue to be the vital growth driver for Raytheon. International bookings comprised 46% and 41% of total company bookings in the second quarter and the first half of 2015, respectively.

In particular, rising demand from the Gulf countries as well as the Asia-Pacific region is turning out to be the company's key revenue driver. Approximately 80 countries procure Raytheon products and hold a higher margin mix upon full production. This mix will support Raytheon's overall industry-leading margin performance going forward. Strong demand from the Middle East is an outcome of the threat posed by changing geopolitical situations in the region. Apart from that, new opportunities in Asia as well as competitive awards in Europe continue to develop. Of late, Qatar has been reinforcing its defense in response to growing threat from Iran.

Raytheon continues to be a strong cash generator helping it to take important cash deployment decisions. Operating cash flow from continuing operations in the second quarter surged 145.8% year over year. Raytheon also raised the lower end of its 2015 operating cash flow guidance.

Zacks Rank

Raytheon currently has a Zacks Rank #3 (Hold). A better-ranked stock in the industry is LMI Aerospace Inc. LMIA, while a couple of well-ranked stocks in the broader aerospace and defense sector are Northrop Grumman Corp. NOC and Lockheed Martin Corporation LMT. All three stocks carry a Zacks Rank #2 (Buy).

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