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Barrow Leaves Technology Stocks, Not Raytheon

March 20, 2014 | About:

Today it can be confirmed that defense budget cuts associated with The Sequester, have not affected all contractors equally. In few words, contractors associated with high-priority projects experienced little to no change in overall performance. On the other hand, projects with low priority were halted or cancelled placing great pressure over those contracted for the job. Raytheon (RTN) is one of the largest defense contractors for the US Department of Defense (DoD), supplying it with missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services. Hence, the projects associated with the firm tend to receive a high priority by the DoD, making projects immune to budget cuts. But, what has Barrow seen on the stock?

Of New Awards and Timely Deliveries

The leading market positioning and quality of products delivered by Raytheon in unquestioned. A clear example is the recent utilization of Magnetic Anomaly Detector for the search of Malaysia Airlines’ missing flight. This is however, the tip of the iceberg. The company during the last month has been awarded and impressive 1.1 billion worth in contracts. According to the company’s website, the Kuwaiti government has destined $655 million for the production of Patriot Air and Missile Defense System units. An additional $350 million has been awarded by the US Missile Defense Agency to increase the procurement of Standard Missile-3 Block IB missiles from 8 to 44.

Nothing makes a customer happier than knowing its placed order will be delivered ahead of time, highlighting the compromise and commitment held by the firm. This is especially important in an industry where time is highly sensitive, as customers may suffer great losses when deadlines are missed. Hence, the delivery of the ninth AN/TPY-2 ballistic missile defense radar to Missile Defense Agency six months before schedule strengthens market positioning, and solidifies the firm’s relationship with US officials.

There should be no surprise when Raytheon is mentioned as a potential developer and supplier for the Three Dimensional Expeditionary Long Range Radar (3DELRR) program. Congress has already appropriated $54.1 million through the National Defense Authorization Act for research, development, test and evaluation. This program may not be a top-priority in Congress, but funds for the next 3 years have already been submitted. In other words, even if funds are not optimal the program will move forward and the company holds a great chance for graving it.

Finance Standing and Prospects

Raytheon is a financially solvent company. Net income has risen through the last 5 years, although total revenues experienced a small decline. On another note, operating margins and a strong cash flow have stood stable through the same period. Meanwhile, debt has risen considerably and overtaken total cash. Trading at 16.7 times its trailing earnings, Raytheon’s stock carries an 11% discount to the industry average. It currently pays $0.55 quarterly dividends, and today (03/20) announced a raise to $0.61.

An important characteristic for Raytheon’s prospects is its international exposure. That is another reason for the company to curb budget cuts. Also, strategic acquisitions and a share repurchase program continue to increase shareholders’ positions. Most importantly at this time of tight budgets, a focus on research and development while keeping final tag price in check will increase chances for landing new contracts with the DoD.

Barrow has recognized the mentioned features some time ago and invested in kind. It is worth noting that all other stocks for this category in Barrow’s portfolio have been reduced. That is telling evidence about the confidence the guru shows on future performance. At the same time, the guru’s decision and current discount make the stock attractive for a long-term investment.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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