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Raytheon Wins $191M Deal to Support ESSM Block 2 Program

Zacks Equity Research

Raytheon Company’s RTN Missiles Systems business unit recently secured a modification contract in relation to the Evolved Sea Sparrow Missiles (ESSM) Block 2. Valued at $190.5 million, this latest deal was awarded by the Naval Sea Systems Command, Washington, DC.

Per the terms of the agreement, Raytheon will provide the remaining long lead time materials pertaining to fiscal 2019 ESSM Block 2 low-rate initial production requirements. Majority of work related to the deal will get executed in Tucson, AZ.

Raytheon is expected to complete the task by March 2023.

A Brief Note on ESSM Block 2 Missiles

Raytheon’s ESSM is an international cooperative upgrade of the RIM-7 Sea Sparrow Missile. It provides self-defense battle space and firepower against high-speed, highly maneuverable anti-ship missiles in the naval environment including aircraft, high and low velocity air threats.

The program is a global joint initiative undertaken by the United States, the North Atlantic Treaty Organization (NATO) and other allied nations that include Australia, Canada, Denmark, Germany, Greece, Norway, Spain, Turkey and the Netherlands. Under this initiative, these countries plan to design, develop, examine and procure ESSM missiles. At present, ESSM has more than 2,000 proven rounds in service or in production, with another 1,500 rounds anticipated.

What’s Favoring Raytheon?

Increasing geopolitical tensions across the globe have prompted nations, both developed and developing, to strengthen their defense systems manifold. Following the rapid technological advancements, missile defense has steadily emerged as a key catalyst for a nation’s defense strategy.

With the United States being the world’s largest weapons supplier, it’s a golden era for the nation’s premier defense contractors like Raytheon.

Being a prominent missile maker, Raytheon frequently secures a number of major contracts for missile development and enhancements. Such contract flows aid its Missile Systems segment to register solid top-line growth. Evidently, the segment registered solid sales growth of 8% year over year during the second quarter of 2019.

Considering the prevailing socio-economic challenges worldwide, particularly between the United States and North Korea, we may expect Raytheon to consistently secure such contracts in coming days.

These apart, the fiscal 2020 U.S. defense budget includes a spending plan of $13.6 billion for varied missile defense programs, which is a positive for Raytheon.

Looking Ahead

Currently, 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 (per Markets and Markets research firm). This, in turn, will provide Raytheon with ample opportunities to enhance its market share in the aerospace and defense industry.

Price Performance

Shares of Raytheon have gained 1.6% in the past month compared with the industry’s growth of 1%.

Zacks Rank & Key Picks    

Raytheon currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same space are Aerojet Rocketdyne Holdings AJRD, Teledyne Technologies Incorporated TDY and Transdigm Group Incorporated TDG, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Aerojet Rocketdyne came up with an average positive earnings surprise of 25.46% in the last four quarters. The Zacks Consensus Estimate for 2019 earnings has risen 13.8% to $1.90 over the past 90 days.

Teledyne Technologies pulled off an average positive earnings surprise of 9.26% for the trailing four quarters. The Zacks Consensus Estimate for 2019 earnings has moved 6.42% north to $9.95 over the past 90 days.

Transdigm Group delivered an average positive earnings surprise of 10.71% in the last four quarters. The Zacks Consensus Estimate for 2019 earnings has climbed 5.9% to $17.99 over the past 90 days.

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