The Dow Jones index has rallied by more than 20% from its February lows, but we’re not out of the woods yet. The economic news remains grim, with unemployment still rising sharply. The trick is to pick stocks with the longevity and financial clout to get through this recession, and prosper when the recovery occurs. Take US defence giant Raytheon. It has a $38.9bn order book, annual turnover of $23.2bn, and a rock-solid balance sheet supported by a strong credit rating and negligible debt. But this is just part of the story. What I like about Raytheon is that it’s jam-packed with some of the world’s smartest military inventions.
Raytheon (NYSE:RTN), tipped as a BUY by Cowen
For example, locked away in its research vaults is a treasure-trove of state-of-the-art surveillance, intelligence gathering, sensing and communications systems, which have been deployed in Afghanistan and Iraq. Its laser-guided rockets (such as the Patriot) can readily knock-out enemy aircraft and ballistic missiles travelling at supersonic speeds. These weapons have even been used to destroy objects orbiting the earth – a growing problem, given the recent damage caused by space debris colliding with communications satellites. Raytheon is also behind much of the electronics in the unmanned drone aircraft now frequently used in warzones. According to research consultants Teal, the market for this type of aerial robot is set to soar from $4.4bn today to around $62bn in a decade’s time, with America accounting for around 70% of the spend.
Given the potential, I’m amazed to see the stock languishing at near-four-year lows. For 2009, the board expects revenues of $24.3bn-$24.8bn, underlying earnings per share (EPS) of $4.45-$4.60 (up from $4.06 in 2008) and positive cash flow of $2.3bn. That puts the stock on a frugal p/e of 8.8, paying a 3.1% yield.
So what are the dangers? Dealing with the government brings its usual headaches, such as contract delays, and there are also concerns over the impact of Iraqi troop withdrawals on America’s $700bn defence budget. The $5.5bn pension deficit could also be a drag on future cash flow, although this shortfall should correct itself in due course. Finally, for British investors there are foreign-exchange considerations, as America represents about 80% of turnover. But with Raytheon’s technology likely to see ever-increasing demand, I believe the stock won’t disappoint patient investors. First-quarter results are due on 23 April.
Recommendation: BUY at $40
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments