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Raytheon (RTN) Secures $618M FMS Contract from Navy for SM-2


Raytheon Company's RTN business unit, Missile Systems, has won a contract from the U.S. Navy to procure full-rate production requirements and spares for fiscal 2017 Standard Missile-2 (SM-2). The procurement will be done for the U.S. and Allied Foreign Navies.

Details of the Contract

The contract is valued at $617.6 million. It includes options that will take the cumulative value of the contract to $652.8 million, if exercised.

Per the terms, the deal covers Foreign Military Sales (FMS) to the countries of Japan comprising 61%, 23% to Australia, 7% to Netherlands, and 6% to Korea.

Work is scheduled to be complete by Mar 2022. Majority of the work will be carried out in Tucson, AZ, while the rest will be executed in various locations across the U.S. The contract will use fiscal 2017 operations and maintenance (Navy); foreign military sales; and memorandum of understanding funds.

A Brief Note on SM-2

Standard Missile-2 is the world's leading fleet-area air defense weapon. It provides protection against a wide range of advanced threats. Also, it has been integrated with both Aegis and non-Aegis combat weapon systems that provide high- and low-altitude intercept capabilities and performance against advanced anti-ship missile threats. The SM-2 has a secondary anti-surface ship mission, and uses tail controls and a solid-fuel rocket motor for impulsion and maneuverability as well.

Notably, the missile can be launched from the MK-41, MK-13 and MK-26 launchers. The most advanced variant, the SM-2 Block IV, has successfully intercepted and destroyed short-range ballistic missile targets, demonstrating the weapon's ability to stop ballistic missile threats in their final phases of flight.

Since a long time, SM-2 has been the primary surface-to-air fleet-air defense weapon of choice for the U.S. Navy. Evidently, it has been deployed by the U.S. and eight allied navies. Moving ahead, the U.S Navy has committed to continue consigning for Standard Missile-2, which proves that it still continues to keep SM-2s in their stock.

Additionally, it should be noted that the SM-2 family continues to grow internationally. To this end, countries like Australia, Canada, Germany, Japan, Korea, the Netherlands, Spain and Taiwan have deployed surface combatants. Furthermore, several other navies are executing ship configurations to support SM-2 applications. To date, Raytheon has delivered over 5000 SM-2’s to the U.S. and its allies.

Potential for Growth

Following in the footsteps of the U.S. and its allies, other countries are working on utilizing advanced technology in their defense systems. Thus, foreign military contracts are a vital growth driver for Raytheon. Evidently, the company’s first-quarter international bookings comprised 33% of its total bookings. During the quarter, international sales were up 7.5%, representing 32% of total sales.

Why Raytheon?

Raytheon is one of the best-positioned companies among large-cap defense players due to its non-platform-centric focus. Moreover, the company has been enjoying a steady stream of sumptuous contracts from government establishments. In April, Raytheon won a modification contract worth $199.8 million from the U.S. Navy to procure 317 of the 17th Lot of AIM-9X Block II missiles.

Again, in February, Raytheon secured a FMS contract, worth $1.07 billion from the U.S. Air Force to provide an early warning radar system to the Qatar government. Additionally, it won a FMS contract valued at $202.2 million from the U.S. Army to provide engineering services for the PATRIOT weapon systems program in the same month.

Price Movement

Raytheon’s stock was up about 20.6% on a year-to-date basis, outperforming the Zacks categorized Aerospace-Defense Equipment industry’s gain of 19.5%. This could be because of rising demand for its defense equipments from MENA or the Middle East and North Africa region, and growth in FMS contracts. Additionally, the company poses strong competition to its peers including Ducommun Incorporated DCO, Triump Group, Inc. TGI and Aerojet Rocketdyne Holdings, Inc. AJRD.

Zacks Rank

Raytheon currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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