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Raytheon’s prospects the best since Cold War on North Korea threat: Analyst

Tae Kim
U.S. Department of Defense | Missile Defense Agency | Reuters. The state-of-the-art THAAD anti-missile system may be a start, but it won't protect Seoul from North Korean missiles.

Rising tensions with North Korea have put U.S. defense contractors in the spotlight, and an analyst at Drexel Hamilton said Raytheon (NYSE: RTN) will be one of the biggest beneficiaries of a boost in defense spending.

Shares of Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC) and Raytheon hit new all-time highs shortly after the market opened Thursday. The names fell later in the morning.

"We enjoyed an analyst dinner with Raytheon management last night … and came away reinvigorated by the opportunity set available to the firm," Drexel Hamilton analyst Pete Skibitski wrote in a note to clients Thursday.

"One senior executive said each of Raytheon's market areas are the hottest he's ever seen, even going back to Cold War days. There was also a view present that the recent hostilities re North Korea could provide impetus to passing an FY18 defense budget above the Trump administration's request," he added.

Skibitski reaffirmed his buy rating and $204 price target on Raytheon shares, representing 14 percent upside to Wednesday's close.

Raytheon is a subcontractor of the Terminal High Altitude Area Defense missile defense system, which is built along with Lockheed Martin. The system is deployed in South Korea and on Guam, where the U.S. has major military bases.

"The administration was said to be very accommodating in terms of enabling international sales," Skibitski wrote. "We think global threats continue to be at very high levels, in Eastern Europe, the Middle East, and Asia."

In similar fashion, Baird on Thursday raised its share forecast for Raytheon by 25 percent on growing optimism over its future missile defense sales.

"We are raising the price target of Raytheon … reflecting the significant programs wins both domestically and internationally for missile defense and missile systems that puts Raytheon in position for favorable organic growth in 2018 and beyond," Baird analyst Peter Arment wrote in a note to clients.

He reiterated his outperform rating and increased his price target for Raytheon shares to $212 from $170.

Many of the large defense stocks have already rallied based on expectations for an improved outlook for U.S. defense spending under the Trump administration.

The SPDR S&P Aerospace and Defense ETF (NYSE Arca: XAR) is up 28 percent since the Nov. 8 election through Wednesday compared with the S&P 500's 16 percent return during the period.

The White House has proposed a nearly 10 percent increase in the military budget to $603 billion for fiscal 2018.

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