2. NYSE: RTN
$107.72
52 Week Range: $89.17 – $113.36
Enterprise Value: $33.9 Billion
Total Shares Outstanding: 308 Million
3. Investment Thesis: BUY
Raytheon is an established defense contractor that has yet to appreciated with its peers
• Anticipates most profitable aspects of the defense industry:
• Dominance in missile development, focus on unmanned systems, expansion into cybersecurity
• Defense is currently unrepresented in Salant’s portfolio
• Healthy despite drop in revenues:
• Regularly improving margins, reliable cash flows, ample interest coverage
• Favorable multiples, leverage and margins are ignored by the market due to decreasing revenues
• Prudent financial actions:
• Share buybacks, increasing dividends, strategic acquisitions
• Cheap leverage will drive up RoE
• Abundant unrealized value:
• Management change with dramatic internal reorganization
• Leaner margins and economies of scale poise Raytheon to dominate industry rebound
• Price target of ~ $130 - $140
4. Industry Overview: Aerospace & Defense
• The industry has seen rapid appreciation
since 2012 despite defense budget cuts
• Characterized by:
• Cyclicality
• High barriers to entry
• Large capital expenditures
• Economies of scale
• Diversified players
• Traditional reliance on US Government
• Risk is mitigated by long funded backlogs
and subcontracting
• Uneven growth in coming years:
• Declining/stagnant revenues in small arms,
shipbuilding and ground equipment
• Growing opportunities in Cybersecurity, UAVs,
and sensors
5. Industry Catalysts
Geopolitics:
• US presidential election
• Recent Israeli election
• Russian aggression
• China vs Japan & Korea
A Shifting Market:
• Rich nations want less
commitment in power projection
• Emerging countries increase
military spending
• Cyber security a growing concern
for all
6.
7. Divisions
Integrated Defense Systems
• $6.085 Billion in 2014
• 24.89% of Net Sales
• DoD, FAA
Intelligence, Information and Services
• $5.984 Billion in 2014
• 24.47% of Net Sales
• DHS, NOAA, NASA
8. Divisions (cont.)
Missile Systems
• $6.309 in 2014
• 25.80% of Net Sales
• Militaries, foreign and domestic
Space and Airborne Systems
• $6.072 in 2014
• 24.83% of Net Sales
• Militaries, foreign and domestic
9. Strategic Business Areas
Raytheon has a declared future focus in these key areas:
• Sensors: radio and radar
• Effects: targeting and location
• C3I(Command, control communications and intelligence): Intel and analysis
• Logistics: supply and organizations
• Cyber: offensive and defensive
High
Command
Artillery
Air
Ground
Units
Into
High
Command
Art.
Air
Ground
Units
11. Leadership Notables
CEO & Vice President of IDS
• CEO: Thomas Kennedy (58), company insider, took office in March 2014
• Consolidated RTN’s 6 divisions into 4
• Contributed to increasing margins, as well as greater efficiency
• Value from reorganization has yet to be fully realized
• Vice President (IDS): Daniel Crowley, joined in 2010 after 27 years as COO of
Lockheed Martin
• Works synergistically with new CEO to encourage new leverage
• Helps to realize value competitors have seen
Executives are compensated primarily with stock, most of which is restricted by time, individual performance, and
company benchmarks. There have been no significant insider trades recently.
12. Financial Actions
• Good margins preserve FCF despite falling revenues, creating large
opportunities to increasing value for shareholders
• $2 Billion in Share buybacks since 2013
• 30% of outstanding shares retired
• New leverage, taking advantage of record low interest rates to
aggressively fund acquisitions
• Consistently Increasing dividends- but ample FCF remaining
2014 2013 2012 2011 2010
42.2% 33.0% 39.8% 33.4% 33.3%
Sustainable FCF to payout ratios
13. Acquisitions
• April 17th , 2015: Raytheon to Acquire Websense for $1.9B
• Develops cybersecurity software for a wide range of applications
• Jan 2015: Sensitel Inc
• Arizona based drone manufacturer
• Nov 2014: Blackbird Technologies for $420m
• Focuses on military cyber operations and intelligence gathering
• June 2013: Visual Analytics
• Software company with products that scrutinize financial crimes
15. Why Cybersecurity?
• Emerging industry that meshes well with defense as a whole
• Traditional risks in software companies—volatility, rapid obsolesce,
are mitigated by Raytheon’s highly stable and diversified cash flows
18. The NOC Case Study:
• A decrease in revenue was mitigated by increasing margins and aggressive
share buybacks, leading to a 132% return over the past 2 years
30,148
32,018
33,887 33,775 34,757
26,412
25,218 24,661 23,979
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2006 2007 2008 2009 2010 2011 2012 2013 2014
NOC Total Revenue (M)
345.4 338.4 326.9 313.8
292.0
261.3
245.4
222.0
202
2006 2007 2008 2009 2010 2011 2012 2013 2014
NOC Shares Outstanding
(Millions)
19. Catalysts
• Poland announcing defense system in coming weeks
• Upcoming quarterly earnings report
• Further contract realizations (playing on company cyclicality)
• Continuing acquisitions
• Further North Korean rocket tests
• More direct Russian aggression
• A President Clinton, or strong rhetoric and promises on Israel from
candidate Clinton
20. Risks
• Fixed price contracts can become unprofitable in the event of sudden
costs
• Raytheon is very diversified, and has continually improving margins
• Competitors secure contracts
• Limited due to Industry practice of subcontracting and RTN’s niche specialities
• Inherent volatility due to links to federal budget
• Assuaged due to current domestic and international political landscape
• Inability to break into cybersecurity industry
• Mitigated by close relationship with government
21. Conclusion
• Raytheon is a sound, diversified and efficient company with
temporarily decreasing revenues but favorable margins
• Large amounts of buybacks, dividends and sustainable leverage
increase RTN’s appeal
• A forward looking approach shows Raytheon is clearly undervalued
due to the markets lack of consideration for the additional value it
can create in its acquisitions, as well as the efficiency gains from its
reorganization
• Projected price of $135-145
