Raytheon Wins $396M Deal to Modify Romania's PATRIOT System

Raytheon Company’s RTN Integrated Defense Systems (IDS) business unit recently won a modification contract for providing Romania with Phased Array Tracking on Radar to Intercept Option (PATRIOT) Fire Unit. The deal came under the foreign military sales (FMS) program.

Details of the Deal

The contract is valued at $395.8 million and has been awarded by the U.S. Army Contracting Command, Redstone Arsenal, Alabama. Work related to the deal will be performed in Andover, Tewksbury, Marlborough and Burlington, MA; Pelham, NH; McKinney, TX and Portsmouth, RI. Work is scheduled to be completed by April 30, 2020.

Raytheon will utilize fiscal 2018 foreign military sales funds to complete the task.

A Brief Note on PATRIOT

PATRIOT is a long-range, high-altitude; all-weather system designed to counter threats from tactical ballistic missiles, cruise missiles and advanced fighter aircraft. Raytheon makes the popular Patriot missile defense interceptors and has consistently focused on upgrading this missile defense system in order to keep pace with the changing dynamics of modern warfare.

What’s Favoring Raytheon?

Last November, a Letter of Offer and Acceptance (LOA) was signed by Romania to procure the Raytheon's Patriot System from the United States. The latest deal seems to be a modification of that LOA, further strengthening Raytheon's international presence, with Romania becoming the 15th nation to purchase Patriot Defense System. Thus, with the addition of Romania, Raytheon sees emerging opportunities and looks forward to expand its market in the European region.

Raytheon, being one of the forerunners in the U.S. missile space, has been enjoying a steady stream of missile contracts from the Pentagon. At the end of March 2018, Poland signed an LOA or Phase 1 with the U.S. government to purchase the company’s combat-proven Patriot air and missile defense system. In January 2018, the company booked a new direct commercial contract for Patriot capabilities worth over $1.6 billion. As a result, Raytheon witnessed an 18.5% improvement in its first-quarter 2018 classified bookings.

No doubt such a solid order flow for the system is capable of substantially boosting Raytheon’s top line. The company’s IDS division witnessed a 7% top-line improvement in the first quarter from the year-ago quarter. The improvement was majorly driven by higher sales from an international Patriot program. In line with this, we expect the latest contract to instill further growth at this segment in the days ahead.

Furthermore, the rocket and missile market is projected to grow from $55.5 billion in 2017 to $70 billion by 2022, at a CAGR of 4.74% during the forecast period (as per Markets and Markets research firm). Given this huge opportunity for expansion, frequent contract wins from Pentagon for its various missiles, including the latest one, will allow Raytheon to further enhance its market share in the aerospace and defense industry.

Price Movement

Raytheon’s stock has improved about 31.1% in the past twelve months, compared with the broader industry’s gain of 28.5%. The outperformance was most likely led by the company’s strong international sales and a robust balance sheet.

Zacks Rank & Key Picks    

Raytheon currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same space are AeroVironment, Inc. AVAV, Boeing BA and Wesco Aircraft Holdings, Inc. WAIR. While AeroVironment sports a Zacks Rank #1 (Strong Buy), Boeing and Wesco Aircraft Holdings carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AeroVironment recorded an average positive earnings surprise of 147.43% in the past four quarters. The company’s long-term growth rate is pegged at 20%.

Boeing recorded an average positive earnings surprise of 29.51% in the past four quarters. The Zacks Consensus Estimate for 2018 earnings has risen by 56 cents to $14.61 in the past 90 days.

Wesco Aircraft Holdings long-term growth rate is pegged at 12%. The Zacks Consensus Estimate for 2018 earnings has risen by 7 cents to 77 cents in the past 90 days.

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