Playing the Defense Industry: Raytheon (RTN), General Dynamics (GD), and United Technologies (UTX)

Now that the Obama administration has quickly named a new general for the War in Afghanistan, questions linger. As General David Petraeus, head of US CENTCOM in the Middle East, takes over for routed General Stanley McChrystal in Afghanistan, what changes may be lurking on the horizon? What can Americans expect in terms of strategy or battlefield adjustments for the war in Afghanistan? And more importantly for investors, how will this play out for weapons systems companies?

On the PBS News Hour, think-tank president Kimberley Kagan (President of the Institute to Study War) characterized General Petreaus’ leadership this way:

He’s a terrific commander. He comes in, and he gets ahold of a problem set, he thinks it through, and he comes to a clear solution about it. Does he adjust time and time again after that? Sometimes. But it takes a lot to persuade him to adjust. So, that means that there will be a lot of forward momentum after six or eight weeks, and it will harder to correct his course six months out.

Given this characterization, any changes in war strategy are likely to happen sooner rather than later. Investors looking to play the defense industry either as a safe bet in an uncertain market or as events play out might well consider these weapons systems companies.

Raytheon (NYSE: RTN)

RTN recently reported net earnings were up 1 percent to $435M on 3 percent higher revenues of $6.05B compared to the year-ago period, for $1.18 EPS. RTN just announced a quarterly cash dividend of 0.375 per share to shareholders of record by July 6 for a yield of 3 percent.

“We delivered strong results during the quarter and reaffirmed our positive outlook for the year,” said William H. Swanson, Raytheon’s Chairman and CEO. “We have strong competitive positions, a proven track record of performance, innovative solutions and technologies that are focused on our global customers.”

Comments: Raytheon is seeing support at today’s $50-ish stock price, which is midway between the yearly high of $60 and the low of $42. It looks like a bottom for RTN at its current price. Also a plus, stochastic is oversold and the technicals look good for a move to the upside. A positive trend is not yet established, but early movers might like this one for its low PE, steady earnings, and its cash position of $6.91 per share.

General Dynamics (NYSE: GD)

The company’s revenues declined 6 percent to $7.75B in its latest quarter from the year-ago period but net income increased 1 percent to $597M for $1.54 EPS.

The company reported $1.54 EPS for the same period a year ago. GD cited decreases in aerospace, combat systems, and technology revenues for the drop in revenue.

“General Dynamics delivered a strong operational performance in the first quarter of 2010,” said Jay L. Johnson, president and chief executive officer. “Operating margins across the company were steady or improving, demonstrating the benefits of our commitment to continuous improvement, and we saw good order activity across the corporation. On balance, General Dynamics delivered solid results, giving us a good first step down the path toward meeting our overall performance objectives for the year,” Johnson said.

GD recently boosted its quarter dividend from $0.38 to $0.42 per share for a yield of 2.6 percent.

Comments: General Dynamics offers a little more volatility than Raytheon, but its technicals look similar. So do the company fundamentals, although RNT is a bit stronger on the balance sheet. RNT looks like the better bet at a lower stock price.

United Technologies (NYSE: UTX)

United Technologies increased profit last quarter with a 20 percent increase in net income to $866M over the year-ago period. Revenues were down by 1 percent to $12.09B.

The company reported EPS of $0.98, better than the prior period with EPS at $0.87 for a gain of 13 percent, and boosted the quarterly dividend to $0.425 for a yield of over 2.5 percent.

“In addition to strong cost traction, we are seeing broader improvement in order trends, especially in the emerging markets. These order trends give us confidence organic growth will resume in the second half of this year. Accordingly, we are raising the lower end of the earnings per share guidance to $4.50 from $4.40. We now expect 2010 EPS in the range of $4.50 to $4.65, up 9 to 13 percent on revenues of $54 billion to $55 billion,” Chenevert added. This range continues to include $350 million of expected restructuring charges and one time gains of $100 million.

The company is trading $10 below its 52-week high.

Comments: Shares of UTX are rebounding better than its peers described here but are trading at a higher multiple. The company also carries more debt than RTN or GD but has somewhat better returns on operations and equity. Still, the decrease in revenues and higher valuation could limit its upside going forward in this turbulent market.

Disclosure: No positions

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