Raytheon Company JAKE GREGG, ADAM SMITH, AND SPENCER ELKINTON
Raytheon CompanyJAKE GREGG, ADAM SMITH, AND SPENCER ELKINTON
Outline
•Description of company•Products•Porter’s Five Forces•SWOT Analysis•Competitive analysis•Forecasting model•Dividend discount model•DCF instrinsic value model•Technical analysis•Conclusion
“Raytheon is well positioned for the future with a proven strategy, well-aligned portfolio of industry-leading technologies and a strong financial foundation. Guided by our long-standing mission of customer success, we are focused on executing flawlessly and delivering innovative and affordable solutions to our global customers in defense, security and civil markets.”
— Tom Kennedy
Chairman & CEO,
Raytheon Company
CEO Statement
Raytheon Overview
Products
Sales by Customer Type
2016:• Standard Missle-6 - $270 Million • 464 Excalibur LB Extended Range Precision Projectiles - $31.8 Million
2015:• 53 Boeing P-8A Poseidon Aircraft Littoral and Overland Radar - $153 Million• Support Operations for NORAD - $700 Million • Communication Systems for 178 C-130 H Hercules Aircraft - $29.6 Million • Advanced Medium Range Air-to-Air Missiles - $528 Million • Combat-Proven Patriot Air and Missile Defense system - $2 Billion• Standard Missile 3 - $559 Million • Tactical Boost Guide Program - $20 Million• Standard Missile 6 - $149 Million • Small Diameter Bomb - $30.94 Million• Multi Object Kill Vehicle - $9.7 Billion
New Government Contracts
2016• Polar Satellite System - $564 Million• Develop a Lightweight Systems to Enhance Capabilities in Complex Environments -
$2.5 Million
2015
• Goddard Space Flight Systems - $240 Million • Federal Aviation Administration GPS Air Navigation - $103 Million • Federal Aviation Administration Weather Processing and Display Infrastructure - $77
Million • NASA’s Johnson Space Center Engineering Services - $101.9 Million• Navigation System for UK Global Combat Ships
2014• Massachusetts Highway Tolling system - $130 Million • Border Security Solutions - $12.9 Million
New Commercial Contracts
3-D Printing
“The user could print on demand. That’s the vision.”
Fewer inputs
Additive process
Shorter development
cycles
Increased Production Efficiencies
Iron Dome & Patriot Systems
Unmanned Air Systems
• Acquired Sensintel, Inc, February 2016
• Low-cost, expendable UAS
• Performs surveillance imagery, targeting capability, real-time damage assessment
• Designed to save lives and reduce operational costs
• Suitable for targeting assistance, perimeter security and research mission
Forcepoint
•Commercial Cyber Security Products
•“Streamlined Defense-Grade Security”
•Acquired Websense in May 2015 to create Forcepoint
•9.8% expected annual growth in cyber security segment
•Commercial cyber security growth expected to outpace military
•315% Revenue growth in 2015
Raytheon’s Strategy
• Build upon our areas of strength within our key mission
areas
• Integrated end products mean RTN’s outputs are complementary to
competitors
• RTN will focus on end product inputs and continue to develop already
established efficiencies and competitive advantages
• Focus additional resources on emerging opportunities
within the DoD market
• RTN shows a proactive approach, working closely with DoD to identify potential
threats and generate solutions prior to an attack
Raytheon’s Strategy, Continued
• Engage key countries as individual markets with multiple
customers
• International sales currently 31% of revenues
• RTN’s transnational strategy demonstrates responsiveness to diverse nations’ defense and
commercial demands
• Extend Raytheon's advanced cyber solutions beyond the U.S.
government into international and commercial markets
• RTN is exploring alternative uses for its cyber-security systems through the Forcepoint
segment
• Forcepoint is now considered its own product segment with dedicated resources to grow
the area and expand to civilian clients
Porter’s Five Forces Analysis
Threat of New Competition
Capital requirements are a barrier
Difficult industry to start Government contracts
difficult to penetrate
Threat level: Low
Threat Substitute Products
Substitutes available through select few vendors
Long-term contracts maintain client base
Consistently advancing technology
Threat level: Low- Medium
Supplier Power
Long term supply contracts mitigate risk
Government suppliers cause pricing pressure
Subject to price fluctuations
Threat level: Medium
Buyer Power
Government contracts subject to pricing pressure
Long-term contracts mitigate price risk
B2B pricing power
Threat level: Low-Medium
Competitive Rivalry
Competitive market saturation
Consistently evolving industry
Threat level: Low-Medium
SWOT Analysis
Strengths
Long term B2B contracts Product integration High R&D investment Current market share Space & Satellite Programs Large backlog Improved Profitability
Weakness
Subject to business cyclicality Limited suppliers Revenues heavily dependent on US
military Debt
Opportunities
Foreign markets Unmanned Air Systems Cybersecurity Market Identify next major technological
advancement Increase demand from FAA & DOT
Threats
Commodity pricing Currency rates Exposure to defense spending fluctuations High-security industry Highly Competitive Market
Most Profitable Wartime Companies1. Boeing
• Arm sales: $31.8 billion, total sales: $68.7 billion• Gross profit: $4 billion
2. Lockheed Martin• Arm sales:$36.3 billion, total sales: $46.5 billion• Gross profit: $2.7 billion
3. General Dynamics• Arm sales: $23.8 billion, total sales: $32.7 billion• Gross profit: $2.5 billion
4. BAE Systems• Arm sales: $29.2 billion, total sales: $30.7 billion• Gross profit: $2.3 billion
5. Raytheon• Arm sales: $22.5 billion, total sales: $24.9 billion• Gross profit: $1.9 billion
*Data based on 2009-2011 sales
Source: USA Today
Due to significant defense contract exposure, RTN
supplies combat equipment, resulting in increased profits
in times of war.
Wartime Affect on Stock Price
America Declares War on Iraq – 3/20/03
September 11
Stock prices rise significantly as conflicts arise and demand for defense products is expected to increase.
Wartime Affect on Stock Price
Paris Attacks – 11/13/15
Attacks on ISIS in Syria begin - 8/8/14
Recent Developments in Defense
•NATO and Russia
• Actively preparing for war. Escalating exercises by both sides have resulted in near misses that could cause conflict.
• “Greatest build-up of military tension since the end of the Cold War”
• NATO Standardization: Buy American defense products.•Operation Inherent Resolve
• War on ISIL and Al-Qaeda• June 2014 – Present• Primarily involves airstrikes on enemy targets. • Over 11,000 airstrikes since 2014, primarily conducted by
American forces.
NATO Initiatives
NATO BMD (Ballistic Missile Defense) Systems use Raytheon technology
Russian Preparation for War
Raytheon’s Moral Responsibility
While RTN does realize higher profits in times of war, RTNprovides innovative defense solutions which minimize collateral damage, focuses on threats to basic human rights, and equips militaries with necessities to protect
billions of global citizens. RTN is currently providing precision guided missiles, missile defense systems, counter-terrorism surveillance systems, and cyber
security systems to combat the global threat of terrorism many countries face today.
“Raytheon is one global team creating trusted, innovative solutions to make the world a safer place.”
Recession Resistance
Macroeconomic Outlook
Obama’s FY2017 request: $551 billionCongressional projections: $600 billionSecretary of Defense Robert Gates proposal: $649 billion
One Year Performance
RTN
Aerospace & Defense
S&P 500
Competitor Analysis
•General Dynamics Corp. (GD)
- Primarily operates in Business Aviation, Combat Vehicles, Weapons Systems and Munitions, Mission Control Solutions, and Information Systems.
- Competes with RTN in Missile Systems, Mission Control, and Information Systems.
•Lockheed Martin Corp. (LMT)
- Primarily operates in Aeronautics, Information Systems, Missiles and Fire Control, Mission Systems and Training, and Space Systems
- Competes with RTN in Missile Defense, Unmanned Air Systems, Information Systems, Electronic Warfare, Mission Control and Training, and Space Systems.
•Textron Inc. (TXT)
- Primarily operates in Commercial Aircraft, Defense, and Industrial segments.
- Competes with RTN in Unmanned Air Systems, Information Systems, Radar and Geospatial Sensors.
Competitor Analysis
RTNLMT
GD
TXT
Competitor Analysis - GD- 70% of sales to U.S. (57%) and
International Governments (13%)
- 30% of sales to U.S. (17%) and International Commercial (13%)
- 44% of sales to Civilian Customers
- 7.9% Undervaluation
- Low Expected Div. Return
- Risk in Aerospace Segment due to business cycle fluctuations
DCF Intrinsic Value Model
Competitor Analysis - LMT- Top U.S. Defense Contractor
- Direct Competitor in all segments which RTN operates
- 98% of sales to U.S. (78%) and International Militaries (20%)
- 9.7% Overvaluation
- Large Div., Slowing Div. Growth
- Lack of Diversification outside of Defense
- Heavily Reliant on U.S. Defense Spending
DCF Intrinsic Value Model
Competitor Analysis – TXT- Textron Systems – Primary
Defense Segment
- 24% of sales to U.S. Military
- Well Diversified Outside of Defense
- 48.8% Overvaluation
- Minimal Dividend
DCF Intrinsic Value Model
Income Statement Forecast
• Revenue is forecasted to grow due to increased demand for Raytheon’s defense and cyber security solutions.
• Raytheon has a $34.7B backlog, 72% of which is fully funded. $17.2B is expected to be filled in the next 12 months.
• Gross margin is expected to expand through 2020 as Raytheon increases its market share in the cyber security segment and increases its production efficiency through initiatives such as 3D Printing.
• Operating margin is expected to expand alongside gross margin.
Income Statement Forecast
• Effective Tax Rate is expected to expand slightly as Raytheon’s foreign sales increase.
• Net Income margin is expected to increase following historical trends and reflecting expectations of increased efficiencies in cost of goods sold.
• Raytheon is expected to continue repurchasing shares through its current buyback program and at a rate slower than the past 5 years.
• Raytheon has announced 2016 dividends of $2.93, dividend growth is forecasted to continue at a conservative rate based on historical trends, with a 5% perpetual growth rate.
Balance Sheet Forecast
• Cash is expected to increase closer to its historical range.• Total Receivables are expected to increase as revenue grows.• Inventory is forecasted to decline closer to the historical trend, primarily due to
growing exposure to the cyber security segment.• Net PPE and Total Assets are expected to remain relatively stable, growing very
slowly, as no large acquisitions are expected in the near future.
Balance Sheet Forecast
• Payables and Accruals are expected to expand from current levels to the historical average, reflecting conservatism in the forecast.
• Raytheon has recently increased its debt position, this is expected to return to historical levels as debt matures.
• Total Equity is forecasted to slowly trend toward the historical range; declining as a percent of sales, but total balance increasing slowly.
Annualized Three Year CAGR
Dividend Discount Model
If purchased for the current price of $126.35, RTN would provide an 11.7% return on projected dividends.
Beta and WACC
DCF Model
DCF Model - Undervaluation
RTN’s market price is currently resulting in moderate 15.1% undervaluation per the DCF Intrinsic Value Model. RTN’s historical market price is trending towards fair value, indicating the likelihood of the market to correct and the price of RTN to appreciate.
ROIC-WACC and EVA
ROIC is projected to rise through 2020, well above the WACC of 6.7%. This results in steadily increasing EVA through the long term.
Relative Valuation
RTN’s relative valuation ratios are expected to grow, though they do not rise significantly above the historical or reasonable range.
Technical AnalysisRTN’s relative
strength is above the market but in a safe range. RTN’s prices
have risen above both 50 day and 200
moving averages, indicating a positive technical trend. RTNhas been in a slight
uptrend since the beginning of April,
and is showing positive growth signs
as current prices break further above the 50 and 200 day
moving averages.
Conclusion
•SIF currently underweight in Industrials sector
•Diversified contracts
•72% of backlogs funded
•Increasing efficiencies growing margins
•Dividend growth provides 11.7% DDM return
•ROIC-WACC spread
•Currently 15.1% undervalued
•Recommendation: BUY