Chasing Value: Raytheon in defense of the nation and your portfolio

Posted Jan 5th 2008 11:10AM by Sheldon Liber
Filed under: International Markets, Management, Adobe Systems (ADBE), Politics, Chasing Value™, Stocks to Buy, Technology, Raytheon Company (RTN), Best Stocks for 2008

Raytheon Co. (NYSE: RTN) is a top-shelf defense contractor, and that is the place to be whether we are at war or we have to replace everything that was destroyed, damaged, or become obsolete. I think the defense sector will be one of the safe havens for 2008. The closing price on December 28, 2007, was $61.51.

RTN is a also a tech stock of sorts, if you look at all the advanced electronic systems it is developing and selling. This is another touted sector lately. I am not happy that 85% of its revenue comes from the federal government, but this revenue is from different agencies. Besides defense, RTN makes radios, air traffic control systems and radar, and satellite communications systems, so airports and security are customers too.

Barron's weekly business journal had a cover story on the opportunities in airline stocks and I posted Airlines: Open skies or just that queasy feeling. I do not care for airline stocks, but if the skies over Europe and New York City are crisscrossed with more flights and added congestion then Raytheon's products should be in greater demand. Airport congestion and security constraints are not going away, they are only getting worse.

They also have products to monitor our borders, another contentious but possibly lucrative business. I can think of many areas to expand into, like college campuses, shopping malls, corporate campuses, the streets, and highways. The list is endless.

In terms of basic fundamentals, my initial review did not reveal any screaming value, but its growth potential and "recession-proof" business offer value. No presidential candidates will be soft on defense in an election year.

Various business publications have also remarked that Raytheon is the best managed of the large defense contractors. The basic metrics are sound, with a PEG ratio of 1.13, a P/B of 2.4, and a P/S of 1.3. The downside does not seem to be a major issue. The P/E of 21 and the yield are only average, but like most of my recommendations, it does have one; 1.7% and that is important too.

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I looked at several other defense contractors and weeded them out for one reason or another, but I think that most of them will do well in the current eco-political environment. It seems to me that if you were to assemble a small portfolio for the next decade there would be merit to including at least one.

To find potential opportunities and verify my track record, read Chasing Value and Serious Money.

DISCLOSURE: I am an active investor. I do not own shares of RTN but may acquire shares at a future date.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.

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