Shares of Raytheon Company (RTN) reached a 52-week high of $64.27 on May 10. In fact, the Mass. based aerospace and defense contractor has seen its stock price climb about 11% since the beginning of the year.
We remain optimistic on the firm’s near-term prospects, supported by its newly realigned segments, effective cash deployment strategy and growing cash flow, and operational improvements. Raytheon retains a Zacks Rank #3 (Hold), implying that it is expected to trade in line with the broader U.S. equity market over the next one to three months.
Why the Bullishness?
Given the declining trend in the U.S. defense spending, Raytheon is one of the best-positioned companies among the large-cap defense players due to its non-platform-centric focus. This insulates the company from program specific risk related to cancellation or deferral of any specific program.
In fact, on Apr 25, Raytheon successfully beat the first quarter 2013 earnings by almost 22%. The reported number was also 5.4% higher than the year-ago figure. The upside was driven by strong program execution.
Recently, Raytheon reorganized its business through segment realignment. The restructuring is expected to streamline operations, increase productivity and achieve stronger alignment with customer preferences.
The company expects the new structure to drive productivity, agility and affordability in a challenging defense and aerospace market environment. It expects consolidation to bring in savings of $85 million on an annual basis. The company raised its adjusted earnings per share guidance to a range of $5.75 to $5.90 from $5.65 to $5.80 earlier for the current year.
Moreover, during the first quarter of 2013, the company repurchased 4.2 million shares for $225 million as a part of its previously announced share repurchase program. Also, Raytheon increased its quarterly dividend by 10%, bringing the quarterly dividend to 55 cents (annualized $2.20 per share) from the previous payout of 50 cents (annualized $2.00 per share).
Raytheon generated operating cash flow from continuing operations of $422 million billion in the first quarter, significantly up from $111 million in the year-ago quarter. The increase reflects working capital improvements and the timing of tax payments.
Overall, opportunities for Raytheon are expected to improve, as it captures a diversified and disparate revenue base that greatly insulates its performance from cancellation, curtailment or deferment of a single program.
Other Stocks to Consider
There are certain other companies in the sector like B/E Aerospace Inc. (BEAV), Wesco Aircraft Holdings, Inc. (WAIR) and Crane Co. (CR) that offer great value and are worth buying now. All these firms sport a Zacks Rank #2 (Buy).
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