Joseph DeNardi, Vice President at Stifel, Nicolaus & Co., says his “buy” rating on defense stock Raytheon Company (NYSE:RTN) is because the company’s product portfolio is best aligned with where demand is.
Their products are heavily focused on missiles, missile defense, sensors, electronics, and I think specifically for the missile and missile defense, demand for those in the Middle East is very strong and getting stronger. Raytheon has the biggest international business out of all the defense companies, and a lot of that is in the Middle East.
I think the concern that investors have is: Are lower oil prices going to negatively impact defense spending from some of Raytheon’s international customers at some point? I think the answer to that is, at some point it probably will, but not in the next few years, I don’t think, because Saudi Arabia isn’t going to defer a missile defense program given the uncertainty in that region. So that’s the pitch on Raytheon.
Our high-level view is even though defense stocks are fairly expensive right now relative to where they’ve traded historically, they’re very high-quality. You get what you pay for to some extent. It’s hard for us to come up with a scenario where you see huge outperformance from the industry like you’ve seen over the past couple of years, but we think that the downside risk is relatively low, assuming they continue to execute well and they don’t engage in M&A outside of their core competencies.
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