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Raytheon to surge on missile defense sales amid rising North Korea tension: Analyst

Tae Kim
Leah Garton | Missile Defense Agency | Reuters. Baird is optimistic over Raytheon's future missile defense sales growth.

Baird just raised its share forecast for Raytheon (NYSE: RTN) by 25 percent on growing optimism over its future missile defense sales in light of rising tensions with North Korea.

"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 Thursday.

Arment reiterated his outperform rating and increased his price target for Raytheon shares to $212 from $170, representing 18 percent upside from Wednesday's close.

Defense stocks surged to all-time highs Wednesday.

Arment said 42 percent of Raytheon's contract backlog is from international customers — the highest percentage among industry peers. He said the company's missile defense systems such as Patriots, THAADs and radars are a "major driver" of its sales to 80 countries.

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

"We attended a Raytheon management-hosted investor event last night that reiterated this theme of large program franchises being refreshed or just commencing for both the DoD and international customers," Arment wrote.

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.

"This budget will be a public safety and national security budget," Trump said on Feb. 27. He called for a "historic increase in defense spending to rebuild the depleted military of the United States of America at a time we most need it."

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