Raytheon Strengthens Market Positions

Strategy

Raytheon Co.'s management has developed a strong reputation. After turning around the world's largest defense electronics company by resolving problems in troubled programs, the management has made the company into a leading performer.

Company profitability has improved dramatically. Profit margins are now high and continuing to increase. The goal now is to make the company more of a systems integrator in areas such as unmanned aerial vehicles rather than a supplier of individual subsystems. Debt reduction has taken precedence over acquisitions al¬though the company has been very active in making small, niche acquisitions in cyber security.

Strengths

Raytheon is one of the best positioned of U.S. defense contractors. Overall the company's expertise in priority areas of intelligence, surveillance, reconnaissance, missile defense and precision engagement put it in the right areas for the future. The company's technical capabilities in sensors and ground stations are highly rated.

The Teal Group projects that over the next decade, Raytheon will be the leading company in command, control, communications, computers and intelligence systems. It will also lead in radar (mainly due to its dominant position in ground-based radar) and electro-optical systems (where it is dominant in unmanned aerial vehicles, particularly on the high end such as Global Hawk and Predator.)

Raytheon has a relatively low risk in its business base because it has approximately 8,000 programs divided into 15,000 contracts, none of which accounts for more than 3 percent of sales. Among large defense contractors, Raytheon has been particularly adept at winning small programs.

Raytheon invests heavily in company-funded research and development. The percentage of sales going to research exceeds comparable companies like Lockheed Martin, Northrop Grumman and General Dynamics, in some cases doubling their levels.

Weaknesses

Raytheon has tremendous difficulties winning large, high-profile contracts against other major defense contractors. It has been unsuccessful in efforts to broaden its business to areas such as acting as a prime contractor for unmanned aerial vehicles or satellites. Homeland security, another priority area, suffered a serious setback several years ago with the cancellation of its UK Border contract due to alleged non-performance.

Opportunities

Raytheon already has a large international business base that continues to grow. The company's strong position in missile defense is promising not only in the US market but also in exports.

Cyber security is a growing field in which Raytheon has developed a strong position. Over time Raytheon will have the potential to translate that strength into commercial markets such as financial services and energy as recognition of the cyber threat grows in those markets.

Despite its UK setback, Raytheon has developed a strong business in homeland security that promise to continue as the company expands its position in border security.

Raytheon's strength in data processing and signal processing give it strong potential in homeland defense as spending gradually increases. There is strong potential for increased international sales, with their higher profit margins, with the best prospects in Patriot PAC-3 air defense system exports to Asia and the Middle East.

Raytheon also is focusing on unmanned aerial vehicles as a area where it can move from supplying sensors and ground stations into becoming a systems integrator.

Raytheon's technical prowess has become clear in recent months with several key victories on major programs. Raytheon beat favorite Lockheed Martin to build a new radar for the Aegis system.

It also beat BAE Systems and Northrop Grumman Corp., companies widely viewed as having greater experience in jammers, to win the Next Generation Jammer competition, a decision ultimately overturned by the General Accountability Office. While the Navy will need to conduct another evaluation before awarding a contract, now Raytheon appears to be the company to beat.

Raytheon also managed to move into the AESA upgrade business for F-16s with its victory over Northrop Grumman in South Korea.

Despite the company's high profit margins, it continues to work to continue to raise those margins. Six Sigma operational improvements have been adopted throughout the company.

Management sees an opportunity in trying to inject speed into the business, make it nimble enough to adapt quickly to change and problems. Common systems have been adapted through the company to enable easy movement of personnel without retraining. The goal is to differentiate Raytheon from other large defense contractors.

Threats

Like other defense contractors, Raytheon will be hurt by growing pressures to cut the US defense budget. Competition promises to grow from Northrop Grumman. Since Northrop Grumman and Raytheon are competitive in many of the same areas in intelligence, surveillance and reconnaissance, Northrop Grumman's decision to spin-off its troubled shipbuilding business enables greater management focus on the company's competitive position in electronics.

Low cost precision-guided munitions manufacturers, such as Alliant Techsystems and the Boeing Co. (JDAM and Small Diameter Bomb), could pose a threat to Raytheon's dominance in the field and its healthy profit margins.

In addition, competition is emerging from a new foreign competitor, China. Turkey's decision in October 2013 to enter into final negotiations with a Chinese company for anti-missile systems due to lower cost systems with greater technology transfer poses a new threat to Raytheon.

Raytheon's efforts to move into adjacent markets have not gone well. The company suffered a serious setback with the cancellation of the UK e-borders homeland security contract for an alleged failure to perform. It also lost the competition to build the Navy's STUAS UAV, which was intended to be its entry into the market