A rogue nation and its cartoonish, unpredictable leader fire two ballistic missiles towards its rival neighbor, a vital U.S. ally. Then the nation claims to have detonated its most powerful atomic bomb ever, which it says will fit nicely on a warhead fitted to those ballistic missiles.
A strongman in charge of a world power decides to invade a sovereign country to “reunite” half its territory with the mother country – twice… and both times during the Olympic Games.
As we all know, these events weren’t lifted from the plot of a spy novel.
They’re happening in the world today. Border wars, frozen conflicts, and saber rattling in the South China Sea, Ukraine, the Russian Caucasus, the Korean Peninsula, Syria, Iraq, Yemen, and Saudi Arabia don’t show any signs of letting up.
A global economy lurching toward recession, bad planning, and poor leadership across the globe don’t help international tensions, either.
But this is precisely the kind of environment lucrative defense stocks thrive in.
In fact, nervous nations with deep pockets are propelling the entire defense sector into a “supercycle” that could be good for steady gains for the next 20 years.
Everyone Needs Missiles
Like I said, worldwide defense spending is on the rise, but here in the United States, there’s a uniquely rich opportunity.
After years of “sequestration” and penny-pinching, the U.S. Department of Defense is embarking on a huge rebuilding cycle. Both presidential candidates are relatively hawkish, and they’ll need well-equipped armed forces to back up any campaign-season positioning.
That means significant defense spending increases for many years to come. That’s a huge opportunity, especially for folks who grab shares of the company I’m about to show you. It’s sitting right on top of the hottest segments among global defense priorities.
It’s the one weapons system that everyone needs, and it’s not any new-school “virtual” or information weapon – missile systems.
They’re practical and affordable, no matter the budget; they can be offensive or defensive nowadays; and the ability to build and maintain them at readiness is the backbone of a credible military presence.
And importantly for investors, they’re a “turnkey” moneymaker for defense firms, which get to sell not just missiles, but entire missile systems and training programs.
Aerospace forecaster AeroWeb says that in 2015 missiles were an $11 billion business in the United States alone. That’s not including the dozens of other countries that are actively looking to enhance their offensive and defensive missile capabilities.
But currently missile defense is enjoying the biggest growth in an already high-growth segment.
We’ve come a long way since the 1980s, when President Ronald Reagan funded the “Star Wars” missile-defense program that turned out to be an impractical hope – the processing power of computers at the time just wasn’t advanced enough to be able to knock out supersonic intercontinental ballistic missiles (ICBMs) consistently.
But that expensive failure held some really valuable lessons in missile defense that have in turn led to some very real breakthroughs.
Call This the “Star Wars Deferred Dividend”
And this is where Raytheon Co. (NYSE: RTN) comes in.
Spun off by some professors at the East Coast tech powerhouse Massachusetts Institute of Technology (MIT), Raytheon’s first “disruptive tech release” was inventing a tube that replaced big and clumsy batteries in home radios in the 1930s. By the time World War II was raging in the 1940s, Raytheon’s tubes were used by 80% of the then-new radar systems used by U.S. and U.K. armed forces.
From there, it wasn’t a long walk to building guided missiles for the Cold War.
Since then, Raytheon has become the go-to company for next-generation radar and missile defense, as well as other “smart” military technologies.
It took the massive amounts of data generated by the Star Wars program and made it more practical. If it couldn’t shoot down fast-moving ICBMs, maybe it could shoot down slower and lower missiles?
That was the birth of the Phased Array Tracking Radar to Intercept on Target (PATRIOT) missile defense, which came into its own during the Gulf War in the 1990s.
The PATRIOT system continues to be one of the biggest sellers in the world, for between $2 million and $3 million per system. There are 1,106 launchers deployed by U.S. forces, with another 172 exported to allies like Germany, Greece, Israel, Taiwan, Japan, Kuwait, Saudi Arabia, and the United Arab Emirates. The company has manufactured more than 10,000 missiles for these launchers.
Today, it’s one of the most accurate, reliable, and cost-effective ways to protect a nation’s borders against unpredictable actors like North Korea, Iran, Syria, China, and Russia.
There’s more “in the pipeline,” too…
Tougher and Faster Than PATRIOT
Missile defense and radar is a $23 billion a year business for Raytheon right now. And even during the defense sector’s recent hard times – “sequestration” – Raytheon has been putting up 3% to 5% growth annually.
Poland recently inked a $5 billion deal for a PATRIOT system. And given concern over an aggressive Russia, it’s likely that other NATO nations will join the club. And the United States will be happy to broker the deals.
What’s more, there’s a new version of the PATRIOT that’s very impressive. It uses Raytheon’s radar in the most advanced missile defense system on the planet – Terminal High Altitude Aerial Defense (THAAD).
Where PATRIOTs have an operational range of about 21 miles, THAAD has an operational range of 120 miles.
In October of last year, the United States offered to place a THAAD battery (about 100 troops) in South Korea. With THAAD, one battery could stop virtually all incoming missile threats from North Korea.
Not surprisingly, China is not pleased with this, because it would also cover Chinese airspace. But the system is only a defense-oriented weapon. China’s main concern is that Raytheon’s THAAD radar can scan entire countries’ airspace for activity.
The Best Defense-Growth Play on the Market
At this point, Raytheon is in the catbird seat in the defense sector – a “supercycle” of spending beginning at home and increasing orders from abroad, with a major product upgrade already deployed selectively.
Raytheon released its second-quarter numbers for 2016 in late July. And they look very encouraging.
Sales were up 3% for the quarter. Bookings grew 10% from last year, year to date. Total operating margin was up significantly, from 11% in second-quarter 2015 to nearly 16% in the second quarter of 2016. Its book-to-bill ratio is a mere 1.18% moving forward, which means that Raytheon is getting paid and delivering on the sales it’s making.
And to top it off, Raytheon guided higher for the rest of the year.
Remember, not only is Raytheon a leader in missile defense, but it builds the “brains” for missile defense, tracking, and acquisition. Its other cybersecurity and intelligence businesses are growing at a strong clip as well.
Missile defense is only the fastest growing segment among Raytheon’s product lines. But everything else is booming, too.
Raytheon is up 35% since I recommended it to you folks about a year ago – and it’s quietly moving up right now. I think it could be good for a cool 11% gain this year alone – but by this time next year, people will be singing the praises of the defense sector and Raytheon.
This is the time to get in, while the crowds are still out of the loop.
- Strategic Tech Investor: Get in on the “Ground Floor” of This National Security Investment.