Raytheon (RTN) To Gain From US-Poland $4.8B Deal For Patriot

Raytheon Company (NYSE:RTN) recently secured a contract to deliver Patriot Missile Systems to Poland, after the country signed a Letter of Offer and Acceptance (“LOA”) agreement with the U.S. government for these missiles systems. The contract turned out to be Poland’s biggest arms deal till date and also made it the 15th nation and 7th NATO member to rely on Raytheon’s Patriot System.

Per Reuters, this deal valued at $4.75 billion requires Raytheon to deliver two Patriot System Batteries, each with two fire units in 2022. This is a major achievement for Raytheon, since in spite of the U.S. State Department having cleared a potential $10.5 billion sale of four Patriot defense systems to Poland last November, the deal got stuck in cross-border negotiations.

Per the agreement, Raytheon will continue to work with Polish defense companies and help them build key parts of the missile system.

Rationale Behind the Deal

It is widely anticipated that Poland signed this deal to strengthen its defense capabilities against rising threats from Russia. According to NATO planners, Russia is using its Baltic enclave of Kaliningrad as well as Crimea to block NATO’s air access to the Baltic states, which represents about a third of Poland.

Naturally this deal form part of Poland’s defense strategy to brace itself from the wraths of Russia, as with two-thirds of the nation’s current weaponry dates back to times of Cold War.

Our View

Raytheon’s Patriot system not only has a strong share in domestic market alone but also expanded its international realm in recent times, in nations like Qatar, Korea, Kuwait and others. In this regard, Sweden is expected to sign a LOA in mid-2018, which approximately worth $1 billion. Inevitably, Raytheon frequently enjoys a solid inflow of missile contracts from overseas and the latest deal with Poland is an evidence of
that.

Moreover, Raytheon hopes the Polish purchase of Patriot may open up new opportunities for the company to supply a more modern Patriot system to Germany, which has not yet signed a contract for Lockheed Martin’s MEADS system. If Germany does sign a deal for purchase of Patriot in near future, surely Raytheon’s international sale growth will get a solid boost.

With increasing geopolitical tension worldwide and President Trump’s proposed fiscal 2019 defense budget (that provisioned $12.9 billion for missile defense) last month, demand for such improved weaponry has been on the rise. Raytheon, being one of the top missile makers in the United States, will surely be a significant beneficiary from the proposed budget, which also includes an investment plan of $1.1 billion for 240 Patriot Missile Segment Enhancements.

Price Movement

Raytheon’s stock has returned about 38.9% in the last 12 months, compared with the broader industry’s gain of 32.7%. The outperformance was primarily led by strong domestic and international sales along with a robust balance sheet.

Zacks Rank & Key Picks

Raytheon currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the same space are Boeing (NYSE:BA) , Huntington Ingalls (NYSE:HII) and Curtiss-Wright Corporation (NYSE:CW) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boeing recorded an average positive earnings surprise of 20.69% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has risen by 27.84% to $14.05 in the last 90 days.

Huntington Ingalls recorded an average positive earnings surprise of 3.85% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has risen by 45.56% to $17.38 in the last 90 days.

Curtiss-Wright Corporation has an average positive earnings surprise of 15.06% for the last four quarters. The Zacks Consensus Estimate for 2018 earnings rose by 11.56% to $5.79 in the last 90 days.

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