Raytheon Upgraded To Buy At Bank Of America On 15% Upside Potential

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In a report published Tuesday, Bank of America Merrill Lynch analyst Ronald J. Epstein upgraded the rating on
Raytheon CompanyRTN
from Neutral to Buy, with a price target of $120. The analyst expects 15 percent upside to the stock valuation, with the company continuing to generate robust FCF. "Defense stocks like RTN are more attractive in an environment where emerging markets are in a recession, while developed markets are driving global GDP growth," analyst Epstein explained, while mentioning that Raytheon's largest customer was the US government, due to which contracts and costs were in US dollars. The analyst also mentioned that defense contractors, like Raytheon, were insulated to a large extent from movement in the US dollar, global GDP and changes in commodity prices. However, about one-third of the company's business comes from overseas customers, and Raytheon has large exposure to the Middle East. According to the Bank of America report, "Continued weakness of oil prices may pressure the buying power of Middle Eastern customers. However, regional instability particularly with the looming threat of a nuclear Iran may boost demand for missile defense systems in the region." In addition, defense companies outperformed the S&P 500 during seven of the nine Presidential election years since 1980, and 2016 is an election year for the US. Raytheon's stock has declined since the announcement of the acquisition of
Websense, Inc.WBSN
in April 2015, which the analyst believes reflects heightened strategic risk for the management as it enters into the commercial cyber security arena via the acquisition. However, the analyst pointed out that Websense's annual revenue of approximately $300 million represents only 1-1.5 percent of Raytheon's total sales. The analyst expects the company to continue to generate robust free cash flow.
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Posted In: Analyst ColorUpgradesAnalyst RatingsBank of America Merrill Lynch
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