More bang for your buck with Raytheon

Raytheon is engaged at the high-tech end of defence procurement. A major supplier to the Pentagon, it is the world’s third largest contractor in terms of pure military sales and it is extremely well connected. Indeed, Robert Work, who until last month was the Pentagon's second-in-command civilian, has just been elected to Raytheon's board of directors.

It is a leading manufacturer and collaborator across a range of defence markets: precision weapons; sensors and imaging; missile defence systems; and electronic warfare. It has recently been prioritising the development of an advanced cyber-security offering. Till now, performance in its cyber-security division hasn't lived up to what Raytheon has seen on the military hardware side of the business, but in the current environment, that hasn't been a huge drag on overall results – and it is seen as an essential area given unfolding defence trends.

Raytheon is the world's largest producer of guided missiles, with dozens of variants currently in service, including the Stinger and Patriot surface-to-air systems and the Tomahawk cruise missile. Unsurprising then that in April, the stock rose on the New York Stock Exchange when it emerged that President Trump had ordered the firing of 59 Tomahawks at a military target in Syria. At around $1m (£780,000) a pop, it’s easy to see how a substantial replacement order could dramatically alter the income statement. Moreover, the $12.4bn market for air and missile defence systems is expected to remain strong for the next decade.

Raytheon, in common with other defence contractors, is waiting for the US Congress to appropriate funding and raise the budget cap to ease through President Trump’s defence spending pledge. It’s becoming a drawn-out process, but the industry outlook remains favourable given ructions in the Korean Peninsula and the South China Sea, not to mention the potential flashpoint that has emerged in the mountain borderlands between India and China.

It’s perhaps unsurprising that a recent survey of industry executives conducted by McKinsey pointed to the Asia–Pacific region and the Middle East as the growth areas over the next three years. Separate analysis on industry attitudes by Deloitte suggests that after years of subdued growth, defence sector revenues are likely to grow by about 3.2 per cent in 2017.

Raytheon is also nailed-on to be a major beneficiary of $110bn arms deal that Donald Trump signed with the Saudis earlier this year. South Korea is boosting the capabilities of its Aegis-equipped fleets as it looks to deter North Korea’s missile development. That has translated into sales for Raytheon’s SM-2 block IIIB missile.