Raytheon CompanyJAKE GREGG, ADAM SMITH, AND SPENCER ELKINTON

Outline

•Description of company•Products•Porter’s Five Forces•SWOT Analysis•Competitive analysis•Forecasting model•Dividend discount model•DCF instrinsic value model•Technical analysis•Conclusion

“Raytheon is well positioned for the future with a proven strategy, well-aligned portfolio of industry-leading technologies and a strong financial foundation. Guided by our long-standing mission of customer success, we are focused on executing flawlessly and delivering innovative and affordable solutions to our global customers in defense, security and civil markets.”

— Tom Kennedy

Chairman & CEO,

Raytheon Company

CEO Statement

Raytheon Overview

Products

Sales by Customer Type

2016:• Standard Missle-6 - $270 Million • 464 Excalibur LB Extended Range Precision Projectiles - $31.8 Million

2015:• 53 Boeing P-8A Poseidon Aircraft Littoral and Overland Radar - $153 Million• Support Operations for NORAD - $700 Million • Communication Systems for 178 C-130 H Hercules Aircraft - $29.6 Million • Advanced Medium Range Air-to-Air Missiles - $528 Million • Combat-Proven Patriot Air and Missile Defense system - $2 Billion• Standard Missile 3 - $559 Million • Tactical Boost Guide Program - $20 Million• Standard Missile 6 - $149 Million • Small Diameter Bomb - $30.94 Million• Multi Object Kill Vehicle - $9.7 Billion

New Government Contracts

2016• Polar Satellite System - $564 Million• Develop a Lightweight Systems to Enhance Capabilities in Complex Environments -

$2.5 Million

2015

• Goddard Space Flight Systems - $240 Million • Federal Aviation Administration GPS Air Navigation - $103 Million • Federal Aviation Administration Weather Processing and Display Infrastructure - $77

Million • NASA’s Johnson Space Center Engineering Services - $101.9 Million• Navigation System for UK Global Combat Ships

2014• Massachusetts Highway Tolling system - $130 Million • Border Security Solutions - $12.9 Million

New Commercial Contracts

3-D Printing

“The user could print on demand. That’s the vision.”

Fewer inputs

Additive process

Shorter development

cycles

Increased Production Efficiencies

Iron Dome & Patriot Systems

Unmanned Air Systems

• Acquired Sensintel, Inc, February 2016

• Low-cost, expendable UAS

• Performs surveillance imagery, targeting capability, real-time damage assessment

• Designed to save lives and reduce operational costs

• Suitable for targeting assistance, perimeter security and research mission

Forcepoint

•Commercial Cyber Security Products

•“Streamlined Defense-Grade Security”

•Acquired Websense in May 2015 to create Forcepoint

•9.8% expected annual growth in cyber security segment

•Commercial cyber security growth expected to outpace military

•315% Revenue growth in 2015

Raytheon’s Strategy

• Build upon our areas of strength within our key mission

areas

• Integrated end products mean RTN’s outputs are complementary to

competitors

• RTN will focus on end product inputs and continue to develop already

established efficiencies and competitive advantages

• Focus additional resources on emerging opportunities

within the DoD market

• RTN shows a proactive approach, working closely with DoD to identify potential

threats and generate solutions prior to an attack

Raytheon’s Strategy, Continued

• Engage key countries as individual markets with multiple

customers

• International sales currently 31% of revenues

• RTN’s transnational strategy demonstrates responsiveness to diverse nations’ defense and

commercial demands

• Extend Raytheon's advanced cyber solutions beyond the U.S.

government into international and commercial markets

• RTN is exploring alternative uses for its cyber-security systems through the Forcepoint

segment

• Forcepoint is now considered its own product segment with dedicated resources to grow

the area and expand to civilian clients

Porter’s Five Forces Analysis

Threat of New Competition

Capital requirements are a barrier

Difficult industry to start Government contracts

difficult to penetrate

Threat level: Low

Threat Substitute Products

Substitutes available through select few vendors

Long-term contracts maintain client base

Consistently advancing technology

Threat level: Low- Medium

Supplier Power

Long term supply contracts mitigate risk

Government suppliers cause pricing pressure

Subject to price fluctuations

Threat level: Medium

Buyer Power

Government contracts subject to pricing pressure

Long-term contracts mitigate price risk

B2B pricing power

Threat level: Low-Medium

Competitive Rivalry

Competitive market saturation

Consistently evolving industry

Threat level: Low-Medium

SWOT Analysis

Strengths

Long term B2B contracts Product integration High R&D investment Current market share Space & Satellite Programs Large backlog Improved Profitability

Weakness

Subject to business cyclicality Limited suppliers Revenues heavily dependent on US

military Debt

Opportunities

Foreign markets Unmanned Air Systems Cybersecurity Market Identify next major technological

advancement Increase demand from FAA & DOT

Threats

Commodity pricing Currency rates Exposure to defense spending fluctuations High-security industry Highly Competitive Market

Most Profitable Wartime Companies1. Boeing

• Arm sales: $31.8 billion, total sales: $68.7 billion• Gross profit: $4 billion

2. Lockheed Martin• Arm sales:$36.3 billion, total sales: $46.5 billion• Gross profit: $2.7 billion

3. General Dynamics• Arm sales: $23.8 billion, total sales: $32.7 billion• Gross profit: $2.5 billion

4. BAE Systems• Arm sales: $29.2 billion, total sales: $30.7 billion• Gross profit: $2.3 billion

5. Raytheon• Arm sales: $22.5 billion, total sales: $24.9 billion• Gross profit: $1.9 billion

*Data based on 2009-2011 sales

Source: USA Today

Due to significant defense contract exposure, RTN

supplies combat equipment, resulting in increased profits

in times of war.

Wartime Affect on Stock Price

America Declares War on Iraq – 3/20/03

September 11

Stock prices rise significantly as conflicts arise and demand for defense products is expected to increase.

Wartime Affect on Stock Price

Paris Attacks – 11/13/15

Attacks on ISIS in Syria begin - 8/8/14

Recent Developments in Defense

•NATO and Russia

• Actively preparing for war. Escalating exercises by both sides have resulted in near misses that could cause conflict.

• “Greatest build-up of military tension since the end of the Cold War”

• NATO Standardization: Buy American defense products.•Operation Inherent Resolve

• War on ISIL and Al-Qaeda• June 2014 – Present• Primarily involves airstrikes on enemy targets. • Over 11,000 airstrikes since 2014, primarily conducted by

American forces.

NATO Initiatives

NATO BMD (Ballistic Missile Defense) Systems use Raytheon technology

Russian Preparation for War

Raytheon’s Moral Responsibility

While RTN does realize higher profits in times of war, RTNprovides innovative defense solutions which minimize collateral damage, focuses on threats to basic human rights, and equips militaries with necessities to protect

billions of global citizens. RTN is currently providing precision guided missiles, missile defense systems, counter-terrorism surveillance systems, and cyber

security systems to combat the global threat of terrorism many countries face today.

“Raytheon is one global team creating trusted, innovative solutions to make the world a safer place.”

Recession Resistance

Macroeconomic Outlook

Obama’s FY2017 request: $551 billionCongressional projections: $600 billionSecretary of Defense Robert Gates proposal: $649 billion

One Year Performance

RTN

Aerospace & Defense

S&P 500

Competitor Analysis

•General Dynamics Corp. (GD)

- Primarily operates in Business Aviation, Combat Vehicles, Weapons Systems and Munitions, Mission Control Solutions, and Information Systems.

- Competes with RTN in Missile Systems, Mission Control, and Information Systems.

•Lockheed Martin Corp. (LMT)

- Primarily operates in Aeronautics, Information Systems, Missiles and Fire Control, Mission Systems and Training, and Space Systems

- Competes with RTN in Missile Defense, Unmanned Air Systems, Information Systems, Electronic Warfare, Mission Control and Training, and Space Systems.

•Textron Inc. (TXT)

- Primarily operates in Commercial Aircraft, Defense, and Industrial segments.

- Competes with RTN in Unmanned Air Systems, Information Systems, Radar and Geospatial Sensors.

Competitor Analysis

RTNLMT

GD

TXT

Competitor Analysis - GD- 70% of sales to U.S. (57%) and

International Governments (13%)

- 30% of sales to U.S. (17%) and International Commercial (13%)

- 44% of sales to Civilian Customers

- 7.9% Undervaluation

- Low Expected Div. Return

- Risk in Aerospace Segment due to business cycle fluctuations

DCF Intrinsic Value Model

Competitor Analysis - LMT- Top U.S. Defense Contractor

- Direct Competitor in all segments which RTN operates

- 98% of sales to U.S. (78%) and International Militaries (20%)

- 9.7% Overvaluation

- Large Div., Slowing Div. Growth

- Lack of Diversification outside of Defense

- Heavily Reliant on U.S. Defense Spending

DCF Intrinsic Value Model

Competitor Analysis – TXT- Textron Systems – Primary

Defense Segment

- 24% of sales to U.S. Military

- Well Diversified Outside of Defense

- 48.8% Overvaluation

- Minimal Dividend

DCF Intrinsic Value Model

Income Statement Forecast

• Revenue is forecasted to grow due to increased demand for Raytheon’s defense and cyber security solutions.

• Raytheon has a $34.7B backlog, 72% of which is fully funded. $17.2B is expected to be filled in the next 12 months.

• Gross margin is expected to expand through 2020 as Raytheon increases its market share in the cyber security segment and increases its production efficiency through initiatives such as 3D Printing.

• Operating margin is expected to expand alongside gross margin.

Income Statement Forecast

• Effective Tax Rate is expected to expand slightly as Raytheon’s foreign sales increase.

• Net Income margin is expected to increase following historical trends and reflecting expectations of increased efficiencies in cost of goods sold.

• Raytheon is expected to continue repurchasing shares through its current buyback program and at a rate slower than the past 5 years.

• Raytheon has announced 2016 dividends of $2.93, dividend growth is forecasted to continue at a conservative rate based on historical trends, with a 5% perpetual growth rate.

Balance Sheet Forecast

• Cash is expected to increase closer to its historical range.• Total Receivables are expected to increase as revenue grows.• Inventory is forecasted to decline closer to the historical trend, primarily due to

growing exposure to the cyber security segment.• Net PPE and Total Assets are expected to remain relatively stable, growing very

slowly, as no large acquisitions are expected in the near future.

Balance Sheet Forecast

• Payables and Accruals are expected to expand from current levels to the historical average, reflecting conservatism in the forecast.

• Raytheon has recently increased its debt position, this is expected to return to historical levels as debt matures.

• Total Equity is forecasted to slowly trend toward the historical range; declining as a percent of sales, but total balance increasing slowly.

Annualized Three Year CAGR

Dividend Discount Model

If purchased for the current price of $126.35, RTN would provide an 11.7% return on projected dividends.

Beta and WACC

DCF Model

DCF Model - Undervaluation

RTN’s market price is currently resulting in moderate 15.1% undervaluation per the DCF Intrinsic Value Model. RTN’s historical market price is trending towards fair value, indicating the likelihood of the market to correct and the price of RTN to appreciate.

ROIC-WACC and EVA

ROIC is projected to rise through 2020, well above the WACC of 6.7%. This results in steadily increasing EVA through the long term.

Relative Valuation

RTN’s relative valuation ratios are expected to grow, though they do not rise significantly above the historical or reasonable range.

Technical AnalysisRTN’s relative

strength is above the market but in a safe range. RTN’s prices

have risen above both 50 day and 200

moving averages, indicating a positive technical trend. RTNhas been in a slight

uptrend since the beginning of April,

and is showing positive growth signs

as current prices break further above the 50 and 200 day

moving averages.

Conclusion

•SIF currently underweight in Industrials sector

•Diversified contracts

•72% of backlogs funded

•Increasing efficiencies growing margins

•Dividend growth provides 11.7% DDM return

•ROIC-WACC spread

•Currently 15.1% undervalued

•Recommendation: BUY